Question

1. name 3 possible reasons for trade protectionism and briefly explain these.

2.If the bank of Canada decides to increase the interest rate, what will happen in the foreign exchange market, and thus to e with a flexible exchange rate system? (please show shifts in curves and explain in terms of Canadian and U.S.dolloars).

3.Briefly compare the advantages and disavantages that fiscal policies and monetary policies have.Use graphs if needed.

Answer 1

1. No countries in the world practises free trade, all governments to some extent do restrict the movement of goods & services in & out of borders. Three possible reasons for trade protection are:

(1) Protecting the infant industry. Often used by developing countries, the countries want to protect the sunrise industries which they feel have good potential to be transformed into international business. But since they have still not realised the cost advantages from economies of scale and need time to to grow their market share, train their labours & learn to produce via the most cost-efficient method. So they need ‘temporary’ protection from low-cost foreign producers until they are able to compete on equal footing. So tariffs are put up, making the once-cheap foreign goods to be artificially expensive. Local producers can now raise the price of their goods & thus enable them to enjoy some profits

(2) Protecting jobs. This is more about protecting the sunset industries or the ones in the economy that are in decline phase. Normally firms in this industry have reached maturity stage but yet inefficient. If there are no further action taken, structural unemployment will increase in these industries and they will be usually labour intensive ones and this will lead to negative spill over onto other industries.

(3) National security. Some governments admit that although they may not have comparative advantage in the production of a good, protectionist measures must be maintained to ensure their survival. Agriculture & steel industries can become strategically important especially in time of crisis or war where they are easily cut off.

Other reasons apart from the ones mentioned above are Revenue from income tax & corporation tax, Protecting consumers from unsafe products and narrowing Balance of Payments Deficit.

(Since in the questions are three different unrelated questions, so as per the guidelines, answering only first question)