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Question 1

How much does the Domestic Price increases with a tariff?

Answer 1

With the amount of the tariff, PT = Pw+t
Larger decrease in imports due to larger price Effect.

Question 2

What are the Effects for the country imposing the tariff?

Answer 2

• Higher Price in the importing country.
• Bad for consumers
• Good for Producers
• Customs revenue to the public sector

Question 3

What is The consumer surplus?

Answer 3

It shows the difference between what people are prepared to pay and what they actually pay. Lower price means higher consumer Surplus.

Question 4

What is The producer surplus?

Answer 4

the difference between the price you get and the price you were Prepared to sell for. Higher price means greater Producer surplus.

Question 5

What is Import quotas?

Answer 5

There is a Limited quantity that can be imported.

Question 6

What are the consequences of import quotas?

Answer 6

It gives an Effect on price and quantity as with tariff but in reverse order. The net welfare effects can be as for tariffs if the import license is sold at the right price.

Question 6

Why are there so many trade restrictions?

Answer 6

• specific factor model: Some may lose, those competing with imported goods.
• Economies of scale: Newcomers may find it difficult to catch up with others lead.

Question 7

What is The general theoretical message of trade?

Answer 7

Comparative advantage and economics of scale increase overall welfare if openness and trade.

Question 8

What are 5 arguments in favour of free trade?

Answer 8

1. Efficient allocation of resources. Trade restrictions lead to efficiency losses.
2. Economies of scale Trade leads to lower prices.
3. Competition and innovations.
4. Rent-seeking
5. Political Process

Question 9

What are the Median voter theorem?

Answer 9

• All voters along one dimension (Preference)
• The median voter is the one in the centre.
• Will vote for policies that benefit most but with big losses for a few.
• Not applicable in the area of trade Policy.

Question 10

What are the incentives for different people with trade restrictions?

Answer 10

• There are strong incentives for large gains from trade restrictions for smaller interest groups that are well organised and good at influence politicians.
• Weak incentives for the broad Public because the policies disadvantage most but with big gains for a few.

Question 11

What does The welfare impact of trade restrictions depends on?

Answer 11

the size of the efficiency loss and the terms of trade gain.

Question 12

What does Free trade leads to?

Answer 12

Efficient allocation of resources, Generates economies of scale and increases competition and the Pace of innovation.

Question 13

What is the Infant industry argument?

Answer 13

• The country could Potentially have comparative advantage
• Governments should temporality support new industries.
• Use tariffs or import quotas as temporary measures to get industrialisation started.

Question 14

What are pitfalls in the infant industry argument?

Answer 14

• Not a good idea to try to move today into the industries that will have a comparative advantage in the future.
• Protection itself must make industry competitive.