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Economics
Macro Y2
4.1.6 Restrictions on Free Trade
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Created by
Panashe Mupfumira
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Cards (18)
Protectionism
The act of
guarding
a country's
industries
from foreign competition, by imposing restrictions on free trade
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A country employs several protectionist measures
Trade deficit would
reduce
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Infant industries
Relatively new and need support
Protectionism
is usually
short
term until the industry develops, at which point the industry can trade freely
Based on the concept of new industries facing
high start-up
costs, which fall as the industry
develops
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Purpose of
protectionism
To help the industry
survive
by providing
support
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Protectionism
Can be used to correct
market
failure
Can deal with
demerit
goods and
protect
society from them
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Reasons for protectionism
Protect
domestic
jobs and avoid them being
offshored
Retaliation
against
trade barriers
imposed by other countries
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Types of restrictions on trade
Tariffs
Quotas
Subsidies
to domestic producers
Voluntary
export restraints (VERs)
Embargoes
Excessive
administrative burdens ('red tape')
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Tariffs
Taxes
on
imports
to a country
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Tariffs
Quantity demanded of domestic goods
increases
, whilst the quantity demanded of imports
decreases
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Tariffs
Result in
higher
prices for consumers and a loss in
consumer surplus
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Quotas
Limit the quantity of a
foreign
produced good that is sold on the
domestic
market
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Quotas
Lead to a rise in the
price
of the good for domestic consumers, so they become
worse
off
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Subsidies to domestic producers
Makes domestic goods relatively
cheap
compared to
imports
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Subsidies to domestic producers
Encourages domestic production to
increase
, as shown by a right shift in the supply curve, and the average price
falls
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Voluntary export restraints (VERs)
When two countries make an agreement to
limit
the volume of
exports
to one another over a period of time
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Embargoes
The complete
ban
on trade with a particular
country
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Excessive administrative burdens ('red tape')
Increases
the cost of trading, and hence
discourages imports
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Impact of protectionist policies
Distort the
market
and lead to a loss of allocative
efficiency
Prevent
industries
from competing in a competitive market and there is a loss of
consumer welfare
Consumers face
higher prices
and less
variety
Firms have little or no
incentive
to lower their costs of production
Impose an extra cost on
exporters
, which could
lower
output and damage the economy
Tariffs
are regressive and are most damaging to those on low and fixed incomes, which could increase income and wealth
inequality
Taxes could raise more
revenue
for the government, which could be used to
redistribute income
to the poor or improve public services
Risk of
retaliation
from other countries, so countries might become
hostile
Could lead to government
failure
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