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Western University
Economics 1022A/B
Charles Middleton

Barriers to Trade - Protectionism; “have to protect our domestic market” o Favour domestic industries Tariffs = Duty - Type of tax o Purpose is not to generate revenue, but to make imports more expensive to domestic consumers o Generates some government income o Equilibrium “World Price” < Domestic Price o When Domestic Demand exceeds domestic production, the solution is to import - Who benefits? o Government? Slightly, from the small revenue o Producer? Yes o Consumer? No, pay hirer prices. o Industry? Yes, in the short run. But it allows the industry to become inefficient and less competitive. - Pros for tariffs o Infant industries; new small industries that need time to grow (need to incubate), need to realize economies of scale and production efficiencies  BUT – difficult to know when and if protection should stop, and is it fair to consumers? o Domestic Employment; using tariffs to keep jobs in Canada  BUT – other countries will retaliate and this can lead to trade war o National Security; too dependent on foreign products (e.g. oil)  BUT – it is possible to stockpile Import Quotas - Limits the supply so that consumers choose domestic goods more often; domestic will be cheaper and more available o But it makes it easier for producers to collude o No revenue collected by the government o Consumers pay more “Rent Seeking” - Industries realize that protections make them enough money to spend resources to continue to seek them Non-Tariff Barriers - Product Standards o Safety o Labeling; nutrition, English/French, care/contents - Subsidies from Government o Money from tax payers and giving it to the industry exporters o Can lead to counter-vailing duties; foreign countries put a duty on the product o E.g. softwood lumber (Canada versus USA) o Use taxation; but charging less taxes/give tax breaks - International Dumping; when sell your product in foreign market for less than cost - Protectionism promotes inefficiencies, favours certain industries, cause trade wars (which cost thousands of jobs) - Why don’t consumers oppose? o Don’t want to lose jobs to overseas (and will in the short run) o Politicians try to scare us into it o Don’t care about the big picture o Patriotism Balance of Payments - Records all the exchanges requiring an outflow or inflow of funds to and from foreign nations in a specific time period - Tells us about our Trade Position in the world - Consists of three parts: o Current Account (NX) o Capital Account (NCO) o Statistical Discrepancy (Official Settlements Account) The Current Account - Record: o Imports/Exports  This represents the largest portion o Goods and Services o Net Investment Income o Net Transfers (Gifts from people/governments, foreign aid, inheritances, immigration) - NX = NCO o Want NX to be positive and NCO to be negative - Current Account Balance o Add all Debits and Credits o Desirable state is account surplus The Capital Account - The current account surplus is a capital account deficit - This records: o International bank loans o Purchases of corporate stocks and bonds o Government bond purchases o Direct foreign investment o Purchase/sale of currencies by Bank of Canada Statistical Discrepancy - if current account surplus does not equal capital account deficit, the difference is recorded in the Statistical Discrepancy (otherwise known as the Official Settlements Account) -
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