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Trade protectionism 1 What is Protectionism? Trade protectionism is the policy that restricts the volume of ______ trade and, in particular, the volume of imports ________. Measures: 1. Tariffs 2. Import quota 3. Voluntary export restraint programmes 4. Production subsidies 5. Embargoes 6. Foreign exchange control Trade protectionism 2 Tariffs imported goods A tariff is a tax on _____________. On an _________ ad valorembasis or a ________ per unit basis. An extra tax on top of the regular tariff$100 is called $50surcharge $50 . import an _______________ Trade protectionism 3 What are the economic effects of tariffs? Price ($) S1 t P1 S0 P0 The price of imports will _______. increase The amount of imports will ________. decrease D Q1Q0 Imports Amount of tariff revenue tariff rate × the quantity imported = ______________________________ Trade protectionism 4 Import Quota The_________ maximum limit on the quantity of goods that can imported into a country. be ___________ No more quota! Trade protectionism 5 What are the economic effects of a quota? Price ($) S1 S0 P1 Part of the supply curve vertical at becomes ________ the quota limit. The price of imported increases goods _________. P0 D Q1 Q0 The amount of imports decreases Imports ________. Trade protectionism 6 What are the economic effects of a quota? Price ($) S1 S0 P1 P0 The effect on the total expenditure on imported uncertain goods is ________, depending on the _______ elasticity of demand for imports. _________ If the demand for imports is D Q1 Q0 Imports inelastic, total expenditure will ________. increase Increase in total expenditure Trade protectionism Decrease in total expenditure 7 Voluntary Export Restraint Programmes Importing country sets a limit on the __________ maximum export volume for the exporting country. Below this limit, the imported goods will be taxed at a _______ lower tariff rate. If the limit is exceeded, the extra imports will be taxed at a much _______ higher tariff rate. It is voluntary in the sense that the exporting country can ______ freely decide the amount of exports given the tariff structure imposed by the importing country. Trade protectionism 8 Production Subsidies Subsidies to the local producers lower the cost of production and the ______ price of the locally _______________ produced goods. Effects: Since locally produced goods and foreign goods substitutes for each other, the demand for are _________ decrease imports will ________. Therefore, the volume of imports will ________. decrease Trade protectionism 9 Embargoes ban on trade. A _____ Can be either a _____ total embargo or a ______ partial embargo. Total embargo Partial embargo No ivory products Iraq Ivory products Embargo imposed by the Trade protectionismThe ban in ivory products 10 UN on Iraq Foreign Exchange Control The government controls the ____________ exchange rate and the availability of ________________. foreign currencies $A / US$ 1 Foreign currencies on market $A / Euro 1.1 Exchange rate Trade protectionism 11 Foreign Exchange Control Effects: More difficult and costly for importers to obtain ________________. foreign currencies As _____ less foreign currency is available to pay for foreign goods, import will ________. decrease Trade protectionism 12 Quiz One A tariff restricts the price of imports only while a quota restricts the quantity of imports only. Explain whether this statement is correct or not. True / False. A tariff _______ raises the prices and ______ lowers the quantity of imports; a quota _______ reduces the supply and _______ raises the prices of imports. Trade protectionism 13 Quiz Two To restrict the amount of imports, using a quota is more effective than imposing a tariff. Why? The amount of reduction in imports by tariff depends on the ___________________ elasticity of demand for ______ whereas the import quota directly imports restricts the _________ maximum amount of imports. Trade protectionism 14 Quiz Three If the government increases the amount of perunit tariff, the tariff revenue will increase. Explain whether this statement is correct or not. Trade protectionism 15 Quiz Three Price ($) S0: supply curve before tariff S2 S1 S1: supply curve after imposing the original tariff S2: supply curve after imposing the new (higher) tariff S0 P2 P1 P0 D Q2 Q1 Q0 Quantity Trade protectionism Gain in tariff revenue Loss in tariff revenue 16 Quiz Three Price ($) S2 P2 P1 P0 Q2 Q1 Q0 The effect of increasing the per-unit tariff amount depends S1 S0 on the gain in total tariff revenue due to ______________ an increase in the tariff rate and the loss in ______________ tariff revenue due to ________ a smaller quantity imported D _________________. Quantity Trade protectionism Gain in tariff revenue Loss in tariff revenue 17 End Quiz Three Price ($) If the demand for imports is inelastic, the gain in tariff revenue will be greater _______ than the loss in tariff revenue and the total tariff revenue will ________, vice versa. increase S2 S1 S0 P2 P1 P0 D Q2 Q1 Q0 Quantity Trade protectionism Gain in tariff revenue Loss in tariff revenue 18