Week 16 Flashcards
Free trade definition
when goods are freely traded between countries without any interference from subsidies, tariffs, quotas or trade barriers
welfare impact for consumers with free trade
with free trade there is a big expansion of consumers surplus because price goes down and the quantity we consume increases
welfare impact for producers with free trade
producer surplus reduced dramatically because only producers that can produce at the lower price can operate in the market
what is the gain on a free trade graph
- triangle in the middle
due to increase available of lower priced goods within the domestic market
trade protection definition
Policies which aim to increase the production of domestically produced goods at the expense of foreign imports
How does trade protection work
have to sacrifice some welfare gain to protect domestic production
what are 4 reasons that UK should use trade protection
- Protect large sunset industries
- support an infant/sunrise industry
- protect strategic industry (energy providing, fracking)
- manage dumping
- raise tax revenue (from tariffs)
- maintain product standards
- correct a trade deficit
dumping definition
when countries sell surplus supplies abroad at less than cost price to manage over supply within domestic markets
4 issues of trade protection
- negative for consumers
- although good for domestic firms they can become complacent > inefficient and noncompetitive
- reduces global efficiency
- retaliation
what are 5 forms of trade protection
- tariffs/duties
- subsidies
- quotas
- embargoes
- trade barriers
tariff/duties definition
a tax on imported goods
subsidies definition
a government payment to suppliers to reduce the net cost of production
quotas definition
a physical limit on the volume of imports permitted
embargoes definition
a complete ban on imports
trade barriers definition
measures which artificially deter the level of imports
what is the impact on domestic production from tariffs, subsidies and quotas
all approaches have the same impact on domestic production and give rise to the same DWL due to reduced productive efficiency
what is the only trade protection that doesnt create a DWL
A subsidy is the only approach not producing a DWL due to the reduced consumer surplus as P remains the same
which trade protection approach carries a cost
- subsidies
which trade protection approach generates revenue
tariffs
which trade protection approach is nuetral and isn’t a cost or producing revenue
quotas
which trade protection is least effective for correcting trade deficits
subsidies are as they have the smallest impact on imports
economic integration definition
where a group of countries take steps to increase the trade levels between them
what are the 5 aims of economic integration
- free trade
- common barriers
- free movement
- common currency
- common fiscal policy
what is complete economic integration
having all 5 aims of economic integration
what is preferential trading area
having none of the 5 economic integration aims
what is an example of free trade areas
- only have free trade (1/5 integration aims)
example:
NAFTA > USA and Canada
what is an example of common markets
- have free trade, common barriers, free movement
(3/5)
example:
EU
What is an example of economic and monetary union
have free trade, common barriers, free movement, common currency
Example:
Euro
what is an example of complete integration
have all 5 aims (free trade, common barriers, free movement, common currency, common fiscal policy)
Example:
UK/USA
trade creation definition
if production switches from high cost producer to low cost producer due to the form of integration
this is seen as efficient
trade diversion definition
if production switches from low cost producer to high cost producer due to the form of integration
this is seen as inefficient
what does that common fiscal policy mean in an economic union
harmonised tax rates and loss of control of monetary policies
