Business
Preseentation
Group Memebers
Tayyaba Zahid
Hamda Aslam
UzmaHill
Batool
By Charles W.L.
Mehwish Noreen
8e
Chapter 6
The Political
Economy of
International Trade
McGraw-Hill/Irwin
How Do Governments
Intervene In Markets?
1: Tariff: Taxes levied on imports (also sometimes
on exports)
Specific tariff: fixed charge for each good imported
Ad valorem tariff: a % of imported goods value
Who gains:
Government
Domestic producers (at least in the short run)
Employees of protected industries keep their jobs
Who loses:
Consumers who pay higher prices
The economy which remains inefficient
Employees of protected industries who dont
develop new skills
6-6
2:Subsidies
Government payment to domestic producers
It can take many forms: Cash grants, low-interest
loans, tax breaks, equity participation, government
purchases
Aim to achieve lower costs to
Compete against cheaper imports
Gain export markets
Increase domestic employment
Help local producers achieve first-mover
advantage in emerging industries
6-7
3:Import Quota
Import Quotas - restrict the quantity of
some good that may be imported into a
country
Tariff rate quotas - a hybrid of a
quota and a tariff where a lower
tariff is applied to imports within the
quota than to those over the quota
A quota rent - the extra profit that
producers make when supply is
artificially limited by an import
quota
6-8
How Do Governments
Intervene In Markets?
4. Voluntary Export Restraints - quotas
on trade imposed by the exporting
country, typically at the request of the
importing countrys government
Import quotas and voluntary export restraints
benefit domestic producers
raise the prices of imported goods
How Do Governments
Intervene In Markets?
6. Administrative Polices - bureaucratic rules
designed to make it difficult for imports to enter a
country
Why Do Governments
Intervene In Markets?
There are two main arguments for
government intervention in the market
1. Political arguments - concerned with
protecting the interests of certain groups
within a nation (normally producers),
often at the expense of other groups
(normally consumers)
2. Economic arguments - concerned with
boosting the overall wealth of a nation
benefits both producers and consumers
6-11
6-14
When Should
Governments
Avoid Using Trade
Paul Krugman Barriers?
argues that strategic trade
policies aimed at establishing domestic firms in
6-16
6-18
6-21
Review Question
When tariffs are levied as a fixed charge for
each unit of a good imported, they are
called
a) Specific tariffs
b) Ad valorem tariffs
c) Tariff rate quotas
d) Transit tariffs
6-23
Review Question
A ________ demands that some specific
fraction of a good be produced
domestically
a) subsidy
b) quota rent
c) voluntary export requirement
d) local content requirement
6-24
Review Question
Which of the following is not a political argument
for
government intervention?
a) protecting jobs
b) protecting infant industries
c) protecting industries deemed important for
national security
d) protecting consumers from dangerous
products
6-25
Review Question
What is the most common political reason for
trade
barriers?
a) To protect infant industries
b) Strategic trade policy
c) To protect jobs
d) To protect industries that are important for
national security
6-26
Review Question
Which theory suggests that in cases where there
may
be important first mover advantages,
governments
can help firms from their countries attain these
advantages?
a) The infant industry argument
b) Strategic trade theory
c) Comparative advantage theory
d) The Leontief paradox
6-27
Review Question
All of the following except _____ are key
issues
on the table at the Doha Round.
a) Anti-dumping policies
b) Protectionism in agriculture
c) Intellectual property rights
d) Infant industry protection
6-28