Trade & Protectionism Flashcards
in a closed economy + opening up of markets + new equil + imports
Standard An - Welfare Gain from International trade (benefit of international trade)
Consumer surplus + producer + explain why welfare gain
(draw the tariff diagram without the tariff essentially)
* In a closed economy, a country which does not take part in international trade, total consumer surplus in the market would P1AB and total producer surplus would be OP1B.
* With the opening up of markets to international trade, the domestic producers are forced to accept the prevailing world price of Pw, which is less than the equilibrium price P1.
* The equilibrium is now at point C and QD1 of the good will be bought.
* Of this, QS1 is produced domestically meaning total imports are QD1-QS1.
* At Pw, total consumer surplus increases by PwP1BC to PwAC.
* Of this, P1PwDB comes from domestic producer surplus.
* The extent to which one group is better off is greater than the extent to which one group is worse off i.e the gain in consumer surplus is greater than the loss in producer surplus, so there is a net welfare gain DBC.
Standard An - Deadweight welfare loss under a tariff
- With the introduction of a tariff the price of goods increases from Pw to Pw+T. For example, the US imposed a 25% tariff on $50 billion worth of chinese imports in 2018.
- This then causes a contraction in domestic demand from QD1 to QD2 and an extension of domestic supply from QS1-QS2.
- At Pw+T, consumer surplus falls by PwPw+THC and producer surplus increases by PwPw+TED.
- The volume of imports falls from QD1-QS1 to QD2-QS2.
- The government revenue from the tariff is equal to the volume of imports multiplied by the size of the tariff, making FEHG government revenue from the tariff.
- Of the fall in consumer surplus, DEF and GHC are unaccounted for, these represent the net welfare loss from the introduction of the tariff since this welfare goes neither to producers, consumers or the government
- Thus making society worse off.
However welfare loss depends on tariff rev + area of rev + if gov spends
Deadweight loss under tariff depends upon what government do with revenue - Evaluation
example of public good + if net social gain>welfare loss…
- However, the net welfare loss to society may not occur depending on what the government does with the tariff revenue.
- The revenue generated by the tariff is the volume of imports multiplied by the size of the tariff. This is denoted by the area FEHG.
- If the government chooses to spend the revenue generated by the tariff on goods that generate net positive social benefits i.e the marginal social benefit is greater than the marginal social cost.
- For example, suppose the government spends the money on public goods which generate positive externalities for society such as street lights
- If the net social gain from government spending on street lights is greater than the welfare loss derived from imposing the tariff, then essentially, society is better off as a whole.
- Therefore imposing a tariff may not necessarily be bad for society.
Standard An - infant industries (benefit of protectionism)
(use comparative advantage diagram)
* One benefit of protectionist measures is to protect infant industries.
* These are industries that are new and developing.
* The government may want to use protectionist measures e.g tariffs to protect growing/emerging industries.
* This is because, by protecting these industries from foreign competiton they can grow and fully exploit economies of scale.
* As a result, they may become a source of comparative advantage…..
Evaluation - Infant industries
(I would use the deadweight welfare of loss under a tariff as an argument against applying protectionist measures on infant industries + retaliation)
Standard An - Employment (benefits of protectionism)
(AD/AS diagram)
* One benefit of protectionism is that it can increase unemployment.
* Some argue that trade restrictions are required to prevent multinational corporations from offshoring production.
* As a result, there are a higher level of domestic jobs as opposed to if there were no protectionist measures (ceteris paribus)
* This may mean that real national output and incomes are higher in the economy due to the protectionist measures as more people domestically have jobs and income meaning that consumption in the economy will be higher (ceteris paribus).
* At AD1 real national output and incomes are lower at Y1 compared to at AD2 and Y2.
* This can protect the domestic economy by maintaining living standards etc…. ATQ
Evaluation - employment
(for this you can go through a whole range of different directions - I would talk about it depends upon the level of inflation + retaliation?)
Standard An - Demerit goods
(negative externalities of production)
* One benefit of protectionist measures are the fact that it can prevent overconsumption of demerit goods by reducing ability to consume.
* If the government applies a tariff on good x (demerit good) then due to the law of demand quantity consumed will be less.
* (negative externalities of consumption standard analysis)
International trade causes economic growth leading to higher living standards - Standard An
(use AD/AS diagram)
* One benefit of international trade is that it can result in a rise in living standards via higher economic growth.
* If incomes in the USA rise (UK’s largest trading partner), then, ceteris paribus, the demand for UK exports will rise.
* As a result, the value of UK exports will rise which, ceteris paribus, increases net exports (X-M).
* This is a component of aggregate demand, meaning that the aggregate demand curve will shift rightwards from AD1-AD2. This results in a rise in incomes, employment and real national output in the UK (Y1-Y2).
* Due to the rise in demand for UK exports, domestic firms may invest in more capital goods to increase spare capacity in order to meet current demand .
* As a result, investment in the UK rises, which, in turn causes the accelerator effect.
* This shifts AD again from AD2-AD3, causing a further increase in real national output and incomes from Y2-Y3.
* As a result of the rise in incomes from Y1-Y3, ceteris paribus, living standards will rise as consumers have a greater ability to consume due to higher incomes thus increasing material lviing standards.
International trade benefits consumers due to increased competition - Standard An
- One benefit of international trade is potentially greater competiton.
- If there is a greater degree of international trade, then domestic firms face greater competition from other rival international firms.
- As a result, this may force firms to become more statically efficient i.e greater allocative and productive effiency can occur. For example, greater productive efficiency takes place as firms have to compete on prices and by decreasing costs i.e becoming more producively effiecient you can then decrease prices and make the same level of profit (ceteris paribus)
- Consequently, consumers may benefit from increased consumer surplus.
What are some costs of international trade?
-Negative externalities of production e.g transporting causes pollution.
-resource depletion - tragedy of the commons
(not something I would particularly write about)
Tariff - Standard An
- A tariff is an indirect tax added on to imported goods in order to try and undermine their price comptitiveness.
- The introduction of a tariff shifts the supply curve upwards to wolrd supply + Tariff and increases the price of imported goods to Pw+t. This causes a contraction of domestic demand from … and an extension of domestic supply.
- Imports fall from … and government revenue from the tariff is equal to quantity imported multiplied by the size of the tariff, making FEHG.
- The tariff, ceteris parbis, reduces imports for x, and increases the quantity of domestically produced goods.
- This is potentially benefical for UK industry, for example sunset industries like steel and shipbuilding.
- By using tariffs to protect these industries from international competiton they can grow and achieve greater economies of scale.
- As a result, they may become a source of comparative advantage in the UK benefitting UK consumers in the future such as increased economic growth.
Retaliation - Evaluation for Tariff
