Answered: Question 5: Trade Policy in Newly…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question 5: Trade Policy in Newly Industrialized/Developing Countries
Infant Industry protection is a key solution for the growth of industrialization of
developing countries. Discuss your answer by using the graph below and any other
graph(s) that you can deem appropriate.

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Step 1

In any developing country, the growth of industrialization is important and for that it is necessary to protect infant industries. It is justified to put tariffs on imports in order to protect the industries and by doing so it will help in developing new industries which will diversify economy.
There are several developing countries that have comparative advantage in the production of primary products but in long term, production of these goods will have few disadvantages. So in order to diversify economy, The developing nations could try developing new manufacturing industries. Though, initially it will be a struggle to fight against foreign rivals because of the lack of access to capital markets and difficulties in borrowing for investment.
Tariffs will help them providing a domestic market for the firms that are new as they get a chance to get established. Later on, with time, these new industries will get more efficient and will benefit from economies of scale and at this stage, tariffs can be decreased.

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