BUS 200 Lecture Notes - Lecture 11: Ad Valorem Tax, Trade Barrier, Import Quota
Chap 7 - Government Policy and International Trade
Classical trade theories of Smith, Ricardo, and Heckscher-Ohlin in Chapter 6 showed that in a world
without trade barriers.
• Free trade refers to a situation where a government does not attempt to restrict what its
citizens can buy from another country or what they can sell to another country
• While many nations are nominally committed to free trade, they tend to intervene in
international trade to protect the interests of politically important groups
Instruments of Trade Policy
How do governments intervene in international trade?
seven main instruments of trade policy
1. Tariffs – specific and ad valorem
o A tax levied on imports
o Specific tariffs are levied as a fixed charge for each unit of a good imported
o Ad valorem tariffs are levied as a proportion of the value of the imported good.
In most cases, tariffs are placed on imports to protect domestic producers from foreign competition by
raising the price of imported goods
income tax was introduced, for example, the U.S. government received most of its revenues from
tariffs.
2. Subsidies
o A subsidy is a government payment to a domestic producer.
o Subsidies take many forms:
cash grants, low-interest loans, tax breaks, and government equity participation in domestic firms
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