Trade and Growth

We already know

• people and nations trade to improve their standard of living
• trade is voluntary 
• trade will only occur if both sides expect to gain something
• a nation will import if world price < domestic price
• a nation will export is world price > domestic price  
• allows nations to specialize in what they do best

recall: law of comparative advantage: through specialization and trade, nations are able to go beyond their PPF

short and sweet: free trade makes everyone better off

but....

Barriers to trade

tariff: excise taxes on imported goods

• revenue tariff: taxes on imported goods not produced domestically in order to raise revenue for the federal government.
• protective tariff: tax designed to shield domestic producers from foreign competition

nontariff barrier: licensing requirements imposed on domestic importers of foreign goods.
quotas. By restricting licensing, governments can restrict imports.

voluntary export restriction: voluntary limitations agreed to in the hopes of avoiding more stringent trade barriers.

Quota: legal limit placed on the amount of a good that can be imported in a given year.

Effects: 

• quotas generate revenue for foreign producers by keeping prices high. 
• tariffs generate revenue for the domestic government.
• in both cases, the prices for domestic consumers are higher. 
• limit potential gains from trade
• protect domestic sellers and the expense of domestic buyers

they also

• reduce efficiency in the allocation of scarce resources
• (slows economic growth!)