Unit 4: The Global Economy

Question 1

Why do countries trade?

Answer 1

1. Lower prices
2. Greater choice of products
3. Differences in resources
4. Economies of scale
5. Increased competition leading to greater efficiency
6. More efficient allocation of resources
7. Source of foreign exchange

Question 2

What is free trade?

Answer 2

Goods and services are allowed to move freely between countries; no barriers to trade

Question 3

Arguments in favour of protectionism:

Answer 3

1. Protecting domestic employment
2. Protecting the economy from low-cost labour
3. Protecting an infant (sunrise) industry
4. To avoid the risks of over specialisation - {issues with dependency}
5. Strategic reasons
6. To prevent dumping
7. To protect product standards
8. To raise govt. revenue {tarriffs}
9. To correct a balance of payments deficit

Question 4

Arguments against protectionism:

Answer 4

1. May raise prices for consumers and producers
2. Less choice for consumers
3. Competition would diminish if foreign firms were kept out of the country
4. Distorts comparative advantage
5. May lead to a retaliation by other countries, with the potential for a ‘trade war’ with escalating tariffs
6. May stunt economic growth

Question 5

What are the main types of protectionism?

Answer 5

Tariffs
Subsidies
Quotas