Chapter 32, Problem 32.3LO

To determine

Ways used by nations to restrict foreign trade.

Concept information:

Free trade refers to the policy of the government which does not put any restrictions on the quantity of imports or exports. Under a free trade economy there are no tariffs, subsidies or quotas to restrict the flow of goods from one country to the other.

Explanation:

The following are the ways used by the nations to restrict foreign trade,

a. Tariffs- Tariff is a tax on imports of goods and services from other countries. It raises the price of imported goods and leads to a shift in the supply curve to the left. As a result of the price of the protected goods rises and the quantity declines. Tariffs can be of two types,

a. Ad valorem tariff

b. Specific tariffs

b. Quotas- A quota is a direct restriction on the total quantity of a good or service that may be imported during a specified period. Quotas restrict total supply of imported goods available to domestic consumers and therefore increase the domestic price of the good or service on which they are imposed.

c. Voluntary trade restrictions- It works like an ordinary quota and raises the price for the domestic product and reduces the quantity consumed of the good or service on which the restrictions are imposed.

d. Other barriers- Apart from tariffs and quotas there are other measures to restrict foreign trade. They involve setting safety standards, labeling requirements, pollution controls, and quality restrictions.