Problem set 2

What is the difference between a tariff and a quota? Do they produce different results?

Both tariff and quota affect the quantity of products that are imported into a country. Tariff adds an additional tax on a product that is imported. Tariffs affect the quantity of imported product indirectly by putting a tax on that product. However, a quota puts a hard limit on the quantity of a product that can be imported. While they do produce similar results, tariffs are more flexible as the quantity that is imported, based on supply and demand, can be affected in the shifts in world price. Quota, on the other hand, puts fixed limit on the quantity that is imported.

What is the argument for government intervening to manage its economic relationship with other nations?

Governments compares its economic performance to other countries and enact policies to improve its relative position. In this regard, trade control can be used to improve the balance of payments, to gain fair access to foreign markets, to bargain trade agreements, and to control prices. The policies enacted by a government is dependent on its relationship with the other country as well as the other country's trade practices.

What is the unempolyment arguement for government intervention for trade?

Governments often want to have high employment as displaced workers often do not find jobs that provide comparable compensation. Often unemployment benefits must be spent on living expenses instead of job skill training for a new job. However, to limit imports to increase employment, the cost must still be borne by the government.

What are some (possible) advantages and disadvantages of trade restrictions?

Increased employment, possible increase in government revenue, possible increase in competitiveness of domestic producers. Disadvantages include trade protectionism weakening the industry in the long run as competition encourages firms to improve and innovate - they have less pressure to do so now.

What is protectionism and what is the rationale behind it?

Protectionism is a form of government restrictions and incentives that are specifically designed to help a country's domestic firms compete with foreign competitors at home and abroad. The rationale for such policies can be economic or noneconomic in nature.

What is the industrialization argument? How does it differ form the infant-industry argument? What are the rationales for the argument and what are the pitfalls?

Similar to the infant-industry argument, the industrialization argument argues for protectionism by stating that a government should shield an industry from the importation of lower-priced foreign products by protecting it, either in forms of tariffs or quotas. This argument assumes an industry requires protection to bolster local competition. Import restrictions may in fact spur foreign direct investment as firms may invest in manufacturing in a country to avoid these regulations. However, if the industry is not able to grow and compete on the global level, local consumers will face the cost of paying higher prices for those products.

What is a subsidy and how do they affect trade?

Subsidy is a direct assistance by governments to boost competitiveness. There are many different types of subsidies, but the most common types of subsidies are low-interest loans or tax breaks. Essentially, the government is decreasing the cost of production for the firm in order to allow it to compete on the global playing field.

What are four non economic rationales and describe them?

The four noneconomic rational for government intervention in trade are a) maintaining essential industries, b) practicing acceptable practices abroad, c) maintaining or extending spheres of influence, and d) preserving national cultures. Governments may deem industries to be essential and apply trade restrictions to protect them. Governments may also want to promote what they deem acceptable practices by pressuring foreign governments to alter their stances on the issue at hand. Governments may also want to use trade to maintain or extend their sphere of influences. Lastly, governments may want to use government intervention to preserve their national culture by limiting exports of items deemed to be a part of their national culture or limiting imports that that may conflict with their domestic values.

What is the infant-industry argument? What are the rationale for this argument and what are the pitfalls?

The infant-industry argument argues for protectionism by stating that a government should shield an emerging industry from foreign competition by protecting it, either in forms of subsidies, tariffs, or quotas. This argument assumes that the infant-industry requires government intervention for the industry to grow. However, it may not be possible for the industry to thrive on its own, regardless on the length of time it is allowed to develop under government protection.