Chapter 32, Problem 1QFR

To determine

To explain:

The three problems with trade restrictions and the three reasons for support of trade restrictions.

Explanation of Solution

Tariffs are the taxes imposed by a home country on exported good. Imposition of tariffs make exported goods costlier for another country.

Import quota is another barrier which restricts quantum of goods to be imported in a home country. It leads to inefficiency in economy.

Imposition of tax on imports makes imports costlier and it leads to increase in cost of production if importing goods are intermediate goods for other goods.

For example: If import tariff is imposed on steel, it makes production of car costlier.

The reasons for trade restrictions are:

1. To protect new and developing domestic industries as they will not be able to compete with foreign companies which are already developed and have reached economies of scale.
2. Environmental or Health issues: Many products which may be deemed hazardous for usage in domestic country can also be banned by trade restrictions.
3. Concern of national security: For many industries, government feels that allowing trade in those industries can lead to problem in national security like weapon manufacturing.

Economics Concept Introduction

Trade restrictions:

The limits that are imposed on trade between different countries to balance, the trade between within country and outside the country is referred to as trade restrictions. Tariffs, Import Quota and tax on imports are problems with trade restrictions.