Global Market in Action
Comparative advantage is the fundamental force that drives international trade. When there is
free trade (imports), consumer surplus increases and total surplus also increases. The producer
surplus shrinks. In exports scenario under free trade, producer surplus expands and total
surplus increases, but consumer surplus shrinks.
International trade restriction
1. Tariffs - is a tax on a good that is imposed by the importing country when an imported
good crosses its international boundary. Tariffs raise revenue for government and helps
the local industry that imported good was competing against. Consumer surplus shrinks
and producer surplus increases and deadweight cost arises.
2. Import quotas- is a restriction that limit the quantity of a good that may be imported in a
given period. It protects the local industries and similar to tariffs, price increases and
quantities brought decreases. The main difference is import quotas brings additional
profit to importers.
3. Other import barriers- Healthy, safety and regulation barriers and voluntary export
restraints ( acts like a import quota).
4. Export subsidies- is a payment by the government to a producer of an exported good.
This results in overproduction in local markets and underproduction overseas resulting in
Popular reasons for protection
1. Helps an infant industry grow- new industries are not as productive and such industries
must be protected from international trade until it can be competitive.
2. Dumping - occurs when a foreign firm se