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

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 gain in consumer surples
-Middle rectangle represents the govt tariff revenue
-Triangles on the right and left of rectangle represent net welfare loss