Ch 24 - Free Trade and Protectionism

  1. Free trade: international trade (imports and exports) without government restrictions    * Trade of goods and services without trade barriers
  2. 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:

     1. 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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  1. 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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  1. 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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  1. 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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  1. Administrative barriers:    * When goods are imported there are always administrative processes

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  1. 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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