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Define free trade
When people can trade without any barriers or restrictions
What are the 4 trade barriers/restrictions on free trade
Tariffs
Quotas
Subsidies to domestic producers
Non tarrif barriers
Define a tariff
A tax on imported goods
Who are tariffs imposed by
Governments
Show a tarrif diagram which has world supply and domestic supply
World supply curve is drawn below the equilibrium as we assume other countries will be able to supply at a lower price than American firms
How do you find out the quantity of imports
the difference between domestic demand and domestic supply, it’s what they get from foreign firms
Using the picture, what’s the quantity of imports
100mill units which is 150-50
What’s the effect of a tarrif on price
Increase
What’s the effect of tarrifs on supply and demand
demand decreased after tariff was introduced and supply increased after tariff and the quantity of imports decreased
Show this effect on a table
A tariff is a tax and so it will increase the price of the imported good and shift the world supply curve up. This will lead to an extension (increase) in domestic supply as domestic producers are willing to sell more at a higher price - remember they don't have to pay the tariff. There will be a contraction (decrease) in domestic demand as consumers don't want to pay a higher price.
If domestic consumers are demanding less and domestic producers are supplying more, there will be a reduction in imports.
Who pays the tarrif
The importer is responsible to pay this which goes to the government. This can raise prices which the consumer pays
Show the area of producer surplus, welfare loss and tax rev
What’s the effect of a tariff on producer and consumer surplus
Producer surplus has increased as they’ll be supplying more at higher prices
Consumer surplus decreased as there paying higher prices
What’s the effect of tariff on gov tax rev
It increased tax rev
Overall what’s the effect of a tariff
Protect domestic industry, domestic producers and gov have benefited
What’s a quota
Is a physical limit on the quantity of imported goods
What are the two main drawbacks of quotas
They don’t raise any tax revenue because there’s no tax placed on imports only a limit
They create shortages - Quotas completely restrict imported goods once the limit of imports are met
Give an example of a quota
Us limiting the number of Japanese car imports to 2 million a year
What’s the effect of quotas on domestic firms
Quotas will reduce imports and help domestic suppliers they also gain more revenue due to higher prices supplying more
What’s the effect on producer
Producer surplus increases as they benefit from higher prices and reduced competition which leads to more profits/investments
What’s the effect of quotas on world supply
World exporters will make less revenue – unless demand is very inelastic, meaning increase in price is greater than fall in quantity.
What’s the effect on employment
dom firms will be able to supply more this may increase the level of employment for domestic firms
Whats the effect on consumer surplus
Reduced consumer surplus as they’ll have to pay higher prices
What’s the effect on welfare loss in society
There will be a net welfare loss to society because the increase in producer surplus is outweighs the decline in consumer welfare
Show a quota graph
What are subsidies to domestic producers
When a government gives a grant to producers to increase supply
What’s the effect of a subsidy on price and quantity
A decrease in the cost of production will shift supply to the right this decreases price and increases quantity
Why are subsidies given to domestic producers
To make domestic goods relatively cheap compared to imports, it encourages domestic production to increase making it more competitive
What’s the effect on consumers
As domestic goods will be cheaper they should switch to their domestic goods reducing the demand for imports from abroad
What’s downside of using a subsidy
expensive for government
In the long run firms may become inefficient as they will rely on the subsidy
if supply is inelastic producers benefit more as they can maintain production levels whilst benefiting from lower costs, increasing rev
If it’s elastic
Consumers will only benefit slightly as there’s lower prices
How can a subsidy make a firm more internationally competitive
If firms are able to meet all of the domestic demand than the excess supply may be exported and dom employment can increase
What type of goods are subsidised
Merit goods usually such as agriculture, transport, housing, healthcare exc
What’s an example in the Uk that’s subsidies
Uk steel industry
