Ch 24 - Free Trade and Protectionism
Free trade: international trade (imports and exports) without government restrictions
- Trade of goods and services without trade barriers
Protectionism:
Protection of domestic industries against foreign competition
Government restrictions are placed on the imports of foreign competitors (tariffs, quotas and subsidies)
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- Arguments for protectionism:
- Protecting domestic employment
- Protecting the economy from low cost labour
- Protecting the economy from low cost labour
- Protecting an infant (sunrise) industry
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- To conclude:
- Protectionism raises prices to the consumers and producers of the input
- Less choice for consumers
- Competition would diminish and domestic firms would become inefficient
- Reduced economic growth
- Comparative advantage is distorted leading to inefficient use of world resources
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Types of protectionism:
Tariff : a tax that is charged on an imported good. Any tax will cause suppliers to supply less
If wheat (example) is not purchased there is a deadweight loss of welfare
There is a deadweight loss of welfare
There is inefficiency of domestic products and a loss of world efficiency
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Subsidy: an amount of money paid by the government to a form per unit of output
- Government is giving the subsidy to the fir to make it more competitive
- Domestic supply curve will shift downward reducing the price
- Consumers are indirectly affected by the government’s use of tax revenues to find the subsidy
- Could lead to higher taxes and is an opportunity cost, governments could spend taxes on other things
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Quotas: physical limit on the number of value of goods that can be imported to a country
Excess demand of Q3Q2, prices begin to rise
As price rises, imports are not allowed to supply more
Domestic products begin to enter the market attracted by the high price of wheat
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Voluntary export restraints:
Agreements between exporting and importing countries in which the exporting country agrees to limit the quality of exports of a specific good below a certain level
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Administrative barriers:
When goods are imported there are always administrative processes
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Health, safety, and environmental standards:
When restrictions are put on the type of goods that can sold in the domestic market
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- Embargoes: complete ban on imports
- National embargoes: marketing campaigns to encourage people to buy domestic goods
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