Types of/Reasons for Restrictions on Free Trade

Question 1

Name and explain the types of restrictions on free trade
(give definitions where necessary)

Answer 1

Tariffs:
-A tax on imported goods

Subsidy to domestic producers:
-Makes production costs lower which helps them become more competitive through lower prices

Quota:
-A strict limit on the quantity of imports

Embargo:
-A ban on specific imported goods

Question 2

Name and explain the reasons for restrictions on free trade
(give definitions where necessary)

Answer 2

Protect infant industries:
-An industry that has recently been established needs time to achieve economies of scale which will allow them to be more competitive through lower prices

Job Protection:
-The govt may be concerned with domestic producers losing out on customers to foreign producers
-This could lead to cyclical or structural unemployment

Prevent Dumping:
Dumping is when a country or company with surplus goods sells these goods off to other areas of the world at very low prices, harming domestic producers in those countries

Protection from unfair competition:
Domestic producers may be unable to compete with a firm that has very low labour costs or very low health and safety costs due to regulation or with a foreign firm that is subsidised by their govt

● Terms of trade: If a country buys a large amount of imports for a certain good, this
will increase demand for that good and hence increase the price. This will worsen the
terms of trade and so therefore they can buy less imports with the amount of exports.
Restrictions will reduce supply of the good and lead to a fall in the price received by
the importer, so improve the terms of trade.

● Danger of over specialisation: Some people believe that no country should
become totally reliant on another for important products or materials and so it is
important to introduce protectionism on these goods to prevent firms and consumers
becoming reliant on them.

Question 3

Go on sketchpad and draw a tariff diagram

Answer 3

Did you remember:
-Initial supply and demand curve
-Price on y axis
-Output on x axis
-Perfectly elastic world supply curve pre-tariff
-Label the Qd and Qs of pre-tariff world supply curve
-Shifts upwards to become world supply post-tariff
-Label new Qd and Qs
-Trapezium on the left represents the change (i think loss) in consumer surples
-Middle rectangle represents the govt tariff revenue
-Triangles on the right and left of rectangle represent net welfare loss