Question

Q6: What are quotas and how do they differ from Tariffs? Q7: Make three arguments for and against Free trade.

Answer 1

With regards to the international trade there are some trade barriers that countries use because they want to protect their domestic economy from foreign competition. Two of them are tariff and quota. A tariff is a kind of tax on imports while quota is a kind of restriction on the amount of imports. When a import quota is implemented by the domestic economy foreign produces can only export the volume of goods set by the government under the import quota. While tariff and quota both increase the producer surplus reduce the consumer surplus and create deadweight loss, a quota is more beneficial Because the import quota are assigned to foreign producers they are actually transfering the amount to foreign producers which is forgone in terms of tariff revenue.

There are many arguments against free trade. There is an expectation that job losses occur in a country that engages in trade. There are some infant industries which are not developed enough to face foreign competition so that should be protected from foreign competition. A country that imports many goods is somehow losing its national security and becoming too much dependent on foreign countries.

Arguments in favour of free trade include the fact that it increases the overall Welfare of the nation. Even if there are job losses there are actually net jobs created in the economy in some other sector. If free trade is not allowed then increased producer surplus and reduced competition will always encourage domestic companies to lobby the government to continue protecting them. In this manner they will never develop and be able to face International competition. Trade barriers reduce the Welfare of the nation so that free trade is necessary to eliminate the dead weight losses.