Free trade

Any action taken by the government designed to give the domestic producer an artificial advantage over a foreign producer e.g. tariffs, subsidies, quotas

Specialisation and exchange of goods and services between nations

Because it is advantageous to do so. Nations have unequal distribution of resources so they specialise in wat they are most efficient at and trade the surplus. Trade always leads to gains

refers to the removal or reduction in any restrictions which limit trade in goods and services. Allows goods and services to be traded freely between countries (free trade)

A tax placed on imports designed to increase the price of the foreign Goods or services that the competing domestic good receives a price benefit.

Grants or payments made by the govt to domestic producers which directly lowers a producers cost of production

- Access to world markets
- Specialisation = leading to lower cost
- Competition = increases productivity and efficiency
- Lowers prices
- Exporting creates employment
- Increases consumption possibilities
- Leads to economic growth

It exists when one country is relatively more efficient at producing a good than another country. This means it has a lower opportunity cost in the production of a partiuclar product than another country

- Natural resources
- Human resources = quality
- Capital resources
- Technology

When a country can produce more of a good than another country by using its resources more efficiently

Households pay higher price at PW, leading to decreased disposable income; consumer surplus has declined leading to decreased welfare and SOL; however, there has been an increase in exports leading to increase in national income, increasing consumption, SOL, employment.
Firms have an increase in production surplus, increased output, profit and investment
Government benefit due to increased tax
Overseas there is a decrease in CAD

Consumers have potential structural unemployment, but now pay PW which leads to increased disposable income, consumption, consumer surplus, SOL
Import competing firms must increase efficiency and have decreased profits, production inputs become cheaper
Overseas is an increase in CAD

Tariffs - a tax placed on import goods (direct)
Subsidies - a grant or payment given by the Goervnment to domestic producers (indirect)
Quotas - a restriction on the number of import goods allowed
Embargoes - complete ban on importing a good

Domestic production expands and domestic consumption contracts
Consumers pay higher price and receive less
Decrease imports in protected industry
Domestic producers gain larger slice of market
Govt receive revenue - revenue effect
Loss of consumer surplus and loss of total surplus due to DWL
# costs for other producers " feed into CPI (higher INF)
May result in lower exports for other producers
May result in á in unemployment

Subsidies preferred to tariffs as seen less restrictive
Subsidies don't raise prices or reduce consumption
Subsidies politically popular b/c favour local producers and don't upset consumers
Subsidies open to review
Tariffs raise revenue, subsidies paid out of govt revenue
Tariffs raise price level
However subsides harm economy as much as tariffs (both have DWL)

Domestic producers gain larger slice of market
Consumers pay same price and purchase same quantity
Hidden tax on consumers as subsidy paid for by govt out of taxpayers money
Opportunity cost - \$\$ used elsewhere in economy
Inefficient producers rewarded at expense of efficient producers
Misallocation of resources
Deadweight loss created - reduce total surplus or economic welfare

Infant industry argument
Local employment
Diversification
National defence
Anti-dumping
Cheap foreign labour
Balance of trade

Comparative advantage
Facilitates international trade
Higher national income
Increased employment in the long run
Increased consumption possibilities
Increases competition
Efficient allocation of resources
Lower production costs
Lower prices leading to lower inflation
Lower chances for trade retaliation

World trade organisation
Replaced the GATT in 1995
Gain liberalisation by helping to lower trade barriers, promotion of world trade, discourages unfair export subsidies, establishes rules of international trade
- MFN (most favoured nation)
- National treatment

International monetary fund
Objective of boosting economic stability by overseeing the international financial system

Negotiated between two or more countries. Under an FTA, countries agree to have no barriers to trade between them

Trade creation
Quicker and easier to negotiate than multilateral agreements
Domestic production increases
Reduces barriers
Increased access to overseas markets
Opens economy
Encourages investment
Enhances economic cooperation

Cover limited goods
Foucs on opening export markets to their producers
Trade diversion

A form of protection which directly restricts the quantity of an imported good.

Is to increase domestic production in the protected industries and decrease consumption of imported Goods and services

include the owners and workers in the protected industries and sometimes the Govt in the case of tariff revenue

The industries given protection will expand production and consume resources that other industries could have used
Production in non-protected industries will fall and these industries will also have to pay higher prices for imported inputs which will reduce their competitiveness
Protection while decreasing imports will also decrease exports
Consumer will also have to pay higher prices for both domestic and imported goods and quantity of goods will decrease
Protection results in a net welfare loss for the economy. Losses > Gains

Impact on price - price increases
Impact on domestic production - increases
Impact on consumption - decreases
Impact on imports - decrease

Producer surplus - increase
Consumer surplus - decrease
Deadweight loss (DWL)is created
Reduction in total surplus or economic welfare - INEFFICIENT

Impact on price - no effect on price to consumer
Impact on domestic production - increase
Impact on consumption - stays the same
Impact on imports - decrease

Producer surplus - increase
Consumer surplus - no change
DWL created - cost of subsidy is greater than the increase in PS
Decreases total surplus and economic welfare - INEFFICIENT