Question

Give four reasons to why governments increase or reduce international trade and FDI with examples for each

Answer 1

A tariff is a tax imposed on goods or services that enter or leave the country by a governing authority. Tariffs typically focus on a particular industry or commodity and are set up in a coordinated effort to change the trade balance between the tariff-imposing country and its international trading partners. Of example, it adds to the cost of importing the defined goods or services when a government imposes an import tariff. Theoretically, this increased marginal cost would deter imports, thereby impacting trade balance.

The specific number of goods imported into a nation is limited by a quota system. Quota systems allow governments to regulate import amounts to help protect domestic industries.

Subsidies are grants granted to domestic industries to assist them in establishing and competing with foreign producers. Domestic producers can charge less for their products by means of subsidies without losing money due to external subsidies.

Governments will boost the domestic economy through the judicious use of quotas, tariffs and subsidies. This may increase the price domestic consumers pay for goods, although this slight inconvenience is generally outweighed by dramatically improved overall economic rates and long-term economic growth.