Tariffs
A tariff is a tax on imports. The tariff maybe in the form of a specific or ad valorem tax. The tariff raises the price of the imported good and lowers its consumption.
The world price is P1 and at price P1, domestic consumption is QD1 and production is QS1. The quantity that is imported is the difference between QD1 and QS1.
Read More»5 Reasons Governments are for Trade Barriers
Many countries and most traditional media are against free trade. They believe that free trade is bad for their economies and hurts growth and employment.
Here are economic reasons used for trade protectionism:
Read More»Comparative Advantage: Factors & Criticisms
In the model for Comparative Advantage, many assumptions are made that do not reflect real world conditions.
- The model assumes constant costs, where as in the real world firms often see increasing returns to scale and economies of scale.
- It’s not possible to move factors of productions so easily from one location to the other (when countries have to specialize in a particular good).
- There are transportation costs that do no exist in the model.
- The model assumes perfect competition which doesn’t exist in the reality. We often see oligopolies and monopolies.
- There are trade barriers that prevent countries from efficiently using comparative advantage.
Factors determining Comparative Advantage:
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