Question

1. Describe the costs and benefits of protectionism. Who gains and who loses? Why are the costs so much more subtle/difficult to see than the benefits?

2. Business Strategy Myths - Suppressed technologies

Review the myth of suppressed technologies. We've all heard stories of technologies that exist but are suppressed by corporations or government. Related to this is the "planned obsolescence" strategy, where new products are regularly released with new features. Is this really a myth? Can you make an economic argument that would support this strategy? Could it backfire?

Answer 1

Benefits of Protectionism

1. The biggest benefit of protectionism is that it keeps the domestic economy flowing. As because of protectionism, the imports decreases and hence demand for domestic goods increases giving the domestic firms a boost as the competition reduces.

2. Since there will be more demand of domestic goods, domestic firms would want to increase output, leading to increase in employment. Domestic firms can now produce and sell more with much less difficulty.

3. Protectionism also favours the new budding firms and industries as now they can grow until they themselves are able to complete in international markets. It acts as a Safeguard to these firms.

4. Protectionism also prevents dumping. Dumping is a process where foreign, grand economies enter an economy and sell their goods at a price lower than the costs of production. Consequently, the consumers of that specific economy are spending more, than the consumers in the overseas areas.

Cost of Protectionism

1. The associated cost of protectionism can be seen through a retaliation reaction from other countries, ruining the relationship of the two nations. I further decreases the specialization level of the two nations, harming their economy.

2. Consumers pay more with protectionism. Without a system of competitive pricing, domestic companies are free to raise their prices without raising the quality of their goods. It also imits consumer access to foreign goods and non-domestic companies that offer unique products and services are also subject to the restrictions.

3. Protectionism prevents nations from maximising their specialization level, using up factors of production inefficiently.

Domestic firm who produce for domestic consumption - Gains

As because of protectionism, the imports decreases and hence demand for domestic goods increases giving the domestic firms a boost as the competition reduces.

Foreign Businesses and Consumers - Loses

Foreign businesses and domestic consumers face the greatest disadvantages of trade protectionism. Foreign Businesses face imbalanced restrictions while their domestic competitors are offered financial advantages, and the consumer ends up paying higher prices for a limited variety of products that are not always worth their costs.

The cost associated with protectionism is much more difficult to see than the benefits because the effect of protectionism is seen in long run. Protection would have very little short run benefits but in a long run will result in reduced worldwide employment and make growth prospects much more difficult as it bring upon a chain reaction of protectionism. One country's protection will not just hurt partner-country exports. In the long run, the formers exports will be affected as well.