ACJC International Trade Answers Essay Qns 2

2024 International Trade Tutorial – Essay Q2 Suggested Responses [2018 A Level Question 6] a) Describe two different types of protectionist policy measure and explain how each type would affect trade. [10] Question Analysis: Command Explain • Start: explain how each protectionist policy works with economic analysis to impact the export (X) and imports (M) of an economy (diagram included where relevant) • End: Link to impact of (X-M) Context Any economy Concepts DD/SS analysis, AD/AS analysis, Impact on (X -M) and link to trade position (refer to syllabus content 3.3.1) Introduction The aims and types of protectionist policy measures: • Protectionism may help an economy to achieve its macroeconomic goals such as preventing rise in unemployment, improving its balance of trade position by protecting its domestic firms/ market. • Protectionism often arises due to government’s attempt to protect it economy from unfair trading competition from trading partners that affect s its export competitiveness or expensive imports from trading partners that may impact its consumers and firms. The impact of protectionist policy measures on trade (X and M): • These measures may eventually increase countr y’s export revenues or reduce import expenditures, enabling country to improve its trade position. R1: Impact of Tariff on trade • A tariff is a tax that is imposed on importers and their imported goods. A specific tariff is a tax calculated as a fixed amount of money per unit of import. • Countries place t ariff on imported goods and services in hope of decrease reliance of imported goods and encouraging the switch to domestic markets . This may thus reduce import expenditure, improving BOT position. • If free trade were allowed, prices of goods such as shoes would be sold in US at P world. The domestic producers will have to sell their shoes at the world price Pw. This is because if domestic producers were to sell shoes at a price higher than Pw, they will lose all consumers to the foreign producers, assuming that the shoes are close substitutes to one another.

After the imposition of the specific tariff of $t per unit, • The s upply curve of imports will shift up to S world + tariff since the tariff is added to the price of every unit of import sold in the country. • Domestic prices will thus increase from Pworld to Ptariff. Tariffs reduce imports and increase domestic production as at this higher price, • Quantity demanded for shoes falls from Q4 to Q3. • More domestic firms are willing and able to sell shoes, and domestic production increases from Q1 to Q2. • O verall, the volume of imports will fall from Q 1-Q4 to Q2-Q3. • Hence, import tariffs allow domestic firms to enjoy higher domestic demand and gain greater producer surplus. This can be seen by the original producer surplus before tariffs, triangle area C, to the new producer surplus of area C + 1. • O verall, tariff has reduced