Trade barrier/Protective tariff/Monetary policy

Economics
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Define the four basic types of trade barriers.Who gains and who loses from a protective tariff?Describe how changes in the Fed’s major policy tools leads to expansionary & restrictive or contractionay monetary policies. ORG. ANSWERS ARE BEST!

Jun 25th, 2014

different types of trade barriers

Tariffs:

  • Tariffs are taxes imposed on imported goods at the port of entry.
  • It is easy to administer and collect, since it is done at one single point which is the point of entry.
  • They are very difficult to avoid or evade.
  • Tariffs help the government earn revenues.
  • If a country does not want a specific good to be imported (for cultural, religious or other reasons) it can impose a very high rate of tariff on that good and reduce and possibly even stop the importation of that commodity.
  • Example:

  • We have ad-valorem tariffs which are also taxes, but they are a definite % of the price of the good.
  • For example a 10% tariff would mean a 60 dollar tax on a 600 dollar imported item.
  • Quota:

  • A quota is a physical quantity limit or maximum amount of a good that can be legally imported over a specific period of time.
  • After tariffs, it is another way to reduce the importation of a good a country does not want to import in market determined quantities.
  • Quotas are difficult to administer, and lead to bureaucratic corruption and smuggling.
  • Bribing the government officials to get a quota allocation or to get higher allocation amounts is a common practice in countries where quota restrictions are imposed.
  • This is true more so in case of underdeveloped and developing economies.
  • They are less efficient than tariffs, although the final objective is the same.
  • Quotas restrict the domestic supply of a good below the level the open market forces of demand and supply would have established.
  • Thus prices are higher than they would otherwise be.
  • This means that some people who could have consumed this good without the quota restriction cannot do so now.
  • Thus the consumption basket of the people goes down.
  • The higher prices (resultant from the quota related supply restrictions) result in a drop in both the consumers and producer surplus.
  • Embargo:

  • Embargo is a total prohibition of trade and commerce with a country.
  • The idea is to economically, financially, socially and politically isolate a country.
  • It has been used by powerful countries to punish a not so strong political opponent.
  • If the USA completely stops its trade with Iran, that would be an embargo.
  • If the USA pressurizes a friendly country, like say UK to also stop trading with Iran, that is called a secondary embargo.
  • USA has a 40 plus year old embargo in place with Cuba.
  • There is no trade and commerce between the two countries.
  • Even private US business cannot do business with Cuba or Cuban companies.
  • Sanctions:

  • A lighter form of an embargo is a sanction, which is a partial restriction on trade and commerce.

  • Jun 26th, 2014

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