WORLD TRADE ORGANISATION WANTS TALKS TO REDUCE PROTECTIONISM
- Explain the main forms of protection used to restrict international trade
Protectionism is the economic policy of restraining trade between countries. There are three main forms of protection against international trade and they are as follows; tariffs- A tax on imported goods which raises the domestic price of imports and thus restricts demand for them; quotas- a physical limit on the quantity of an imported good; Subsidies- a form of financial assistance paid to a business or economic sector. Most subsidies are made by the government to producers or distributors in an to prevent the decline of that industry. Other forms of protectionism include policies in some countries to buy only domestically produced goods, taxes which impose a tax burden upon the consumer, they can be ad-valorem which is a percentage of the price of the product or a fixed rate tax, and finally other government legislations are forms of protectionism
- Discuss whether protectionist policies will always produce benefits to an economy
Protectionism is the economic policy of restraining trade between countries. Protectionism benefits the economy as the government is able to gain tax revenue from protectionism such as tariffs. The government can use tax revenue to put towards merit goods- goods which are underprovided by the government (goods which people think should be provided in greater quantities) and create large quantities of positive externalities such as education which creates external benefits. Protectionism also benefits domestic producers as there is less competition, therefore there will be an increase in demand, supply and sale of homemade produce. Another benefit of protectionism is that it stops dumping. Dumping is the sale of goods at less than cost price by foreign producers in the domestic market. As a result large quantities of products are unnecessarily provided (dumped) upon countries. The fact that protectionism such as quotas is imposed stops this from happening. Finally protectionism reduces the number of infant industries and child labour.
The disadvantages of protectionism are that it has negative impacts on both foreign and domestic suppliers. People are less likely and willing to supply abroad because of restrictions on the quantity that can be supplied (quotas) and heavy taxes on goods (tariffs) from which the money is taken largely from the suppliers. This means that there is less choice of goods available; there is a lack of competition in the market and resultantly a lack of innovation. People have far less choice and countries are less likely to specialise in producing goods, therefore the quality of goods produced may fall. Protectionism can also lead to retaliation as well as cost inflation depending on the value.
In conclusion, it depends on the size of the size and quantity of protectionism to see how it affects the economy. In terms of the UK economy there is no dumping or infant industries so protectionism has more disadvantages than benefits. Therefore protectionism doesn’t always produce benefits to an economy.
CINEMA TICKETS ARE PRICE ELASTIC IN DEMAND
- Why do different goods and services have different price elasticities of demand
Price elasticity of demand is the responsiveness of change in demand to a change in price. Different goods and services have different elasticities of demand based on a number of different factors. One factor is the availability of substitutes. If a good or service has a large amount of substitutes for instance coffee can be substitutes with tea, hot chocolate, hot milk, hot water etc then it is likely to have elastic demand. However if the good has few substitutes, for instance food and haircuts then there will be inelastic demand. Another influence on price elasticity of demand is the scarcity of the good. Oil is very low in quantity available and there are little or no substitutes for it, therefore it has a very inelastic demand, there is little or no responsiveness to a change in price. Price elasticity of demand can also be affected by the type of good. Demerit goods such as drugs, alcohol and tobacco are demand inelastic as they have few substitutes and arouse feelings that you cannot get from other goods. Public good have elastic demand as there are plenty, available to all without losing benefits and the free rider problem shows people are not willing to pay for these goods.
- Evaluate the view that the only way a firm can raise its revenue is by reducing its price
Firms can raise revenue by reducing prices as the demand for products increases with a lower price.
The diagram above shows how a fall in price leads to an increase in demand for a good or service. This is shown by an increase in supply from S1 to S2 which shifts the equilibrium market price down shown by a movement along the demand curve.
However, reducing prices is not the only way a firm can approach to raise its revenue.
The above diagram shows that by increasing the demand for a good or service shown by a shift right in the demand curve from D1 to D2 you are able to increase the price of the good or service, thus increasing revenue, shown by a movement along the supply curve. This increase in demand can be achieved by promotional offers, a unique good or service, improving the features of a good or service or by advertising the product.
In conclusion reducing prices is not the only way to reduce revenue, although it can be argued that it is the best solution, another way to raise revenue is by raising demand for the good or service thus increasing revenue.
THE POUND FALLS AGAINST THE EURO IN DECEMBER 2002
- Explain the factors that may have led to a fall in the value of the pound on the foreign exchange market
An exchange rate is the value of one currency in terms of another. There are a number of factors that can lead to a fall in the value of the pound on the foreign exchange market. The value of the pound is affected by the supply and demand of the pound on the foreign exchange market. This is known as the floating exchange rate. If the supply of pounds exceeds demand then its value will go down and vice-versa. Several other factors influence the demand and supply of the pound. If interest rates are higher in the UK than in other countries, then people will choose to invest in the UK. However, if interest rates are lower in the UK than any other country then people will choose to invest abroad, thus reducing demand for the pound, leading to a fall in the value of the pound. If the UK inflation rate is higher, investors are less likely to prefer the UK- even with higher interest rates- because of the expectation that the value of the pound will be eroded by inflation, thus leading to a fall in the value of the pound and vice-versa. Trade balance also has an effect on the value of the pound. If world prices for the UK’s exports fall in comparison with the cost of the country’s imports, the UK will be earning less for exports than it pays out for imports. The less demand there will be for the pound, the worse the deal becomes. If investors aren’t confident that the UK economy will be strong, they will be less likely to buy UK assets pushing down the value of the pound.
- Discuss the view that a depreciation of the exchange rate will always benefit the UK economy
A depreciation in the exchange rate of the pound will benefit the economy as exports will become cheaper, therefore more are sold and imports will become more expensive, therefore less will be bought. This will help balance national expenditure as exports are greater than imports (X-M), there will be no trade deficit. A fall in the exchange rate will increase aggregate demand shown by a shift to the left in the aggregate demand curve from AD1 to AD2 as shown in the aggregate demand and supply curve below. This will have many positive impacts on the economy: unemployment will fall, therefore firms will benefit from skilled and unskilled labour that is available thus increasing their productivity, people will be able to provide for their families and the government won’t have to pay out as much benefits such as Job Seeker’s allowance (JSA); the value of debt will fall because of inflation; GDP growth will increase; finally, low interest rates will benefit firms as it encourages consumer spending.
The disadvantages of a fall in the exchange rate of the pound are that there is a rise in inflation. This is bad as it creates a rise in the cost of essential imports. If the UK inflation rate is higher, investors are less likely to prefer the UK- even with higher interest rates- because of the expectation that the value of the pound will be eroded by inflation. If inflation in the UK economy continues to rise it could lead to hyper inflation where large sums of bank notes are worthless. Another disadvantage of a fall in the exchange rate of the pound is that it lowers interest rates; so whilst the value of debt falls, people will be less inclined to save because of low interest rates. If interest rates are lower in the UK than any other country then people will choose to invest abroad, thus reducing demand for the pound.
In conclusion it depends on how much the exchange rate falls by to determine how the economy will be affected. A depreciation of an exchange rate will not always benefit the UK economy as seen above, but it will be overall beneficial to the economy as the advantages outweigh the disadvantages.
UK TAX BURDEN SET TO RISE
- Outline what is meant by the circular flow of income and explain how a rise in UK taxes might affect it
The circular flow of income is a model of the economy which shows the flow of goods, services and factors of production and their payments around the economy. Below is the model of the circular flow of income.
Taxes are an example of a leakage. Leakages are non consumption uses of the income generated from production. The three leakages are saving, taxes and imports. They are called leakages because they are ‘leaked’ out of the core circular flow of consumption, production and income. A rise in taxes will affect the circular flow of income as there will be more money flowing out of the economy than there is coming into it which could lead to deficits.
- Discuss the view that the government should reduce taxes on income and profits and increase its taxes on spending
The advantages of reducing taxes on income is that it can raise revenue for the government, however if raised above a certain percentage of income (raised too high) or below a certain percentage of income (too low) the government will not receive maximum tax revenue. This is illustrated by the Laffer curve below.
If above the maximum workers will be less willing to work longer hours and days, firms will therefore not benefit from highly skilled workers and lack of motivation to work could mean that the productivity of the firm falls.
The advantages of increasing taxes on spending is that it encourages saving and therefore helps the banks. The government can use revenue collected to spend on merit goods- goods which are underprovided by the government (goods which people think should be provided in greater quantities) and create large quantities of positive externalities such as education which creates external benefits. The disadvantages of taxing on spending is that it decreased the number of sales made by firms and in the long run could reduce profits.
This is because an increase in tax would shift the supply curve to the left from S to S + tax. This would increase the price of the product or service thus reducing the demand, shown by a movement along the demand curve. The tax diagrams above show the impact of a fixed tax and ad valorem tax on goods and services.
In conclusion it depends on the size of the tax; overall I believe that the government should not reduce taxes on income and profits and increase its taxes on spending because this is unfair to those income earners and will affect firms more than if you keep taxes on income and profits the same, the benefits outweigh the disadvantages depending on the size of the taxes.
BRITAIN CLOCKS UP DISMAL RECORD ON PRODUCTIVITY AS TRADE DEFICIT CONTINUES
- Explain with examples the measures that could be taken to raise productivity in the UK economy
Productivity is the amount of output per unit of input (labour, equipment and capital). One method of improving a firm’s productivity is division of labour, this is specialisation by workers. Division of labour is a form of specialisation. Firms use specialisation to make production more efficient; it means they can divide up their workers and get each of them to do a specific job/task. The benefits of this are that workers can play to their strengths, skills are improved, techniques can be broken down into simple tasks. Another way to increase productivity is by raising the level of investment. This can be done by putting more investment towards machinery and technological advances. This raises the level of productivity as output cannot vary as it’s done by machine, it saves the costs of employees and having to pay for longer working hours although could lead to unemployment and machinery can be hard to operate and can malfunction. Another way to raise productivity is by improving the education system or making education compulsory up to the age of 18, therefore people will be more prepared for the working world and firms will benefit from new skilled labour that has more developed knowledge in a particular field. For existing workers firms could run training schemes to improve the productivity of the firm so that workers can become more efficient at their job and develop a more sustained knowledge of it through the help of specialists. However, this can be long and costly. Other methods of raising productivity include reformed infrastructure.
- Evaluate the view that the UK’s trade deficit can only be solved by the implementation of supply-side policies
Supply-side policies are government policies designed to increase the productive potential of the economy and push the long run aggregate demand curve to the right as illustrated in the diagram below.
The advantages of supply-side policies are that it improves the productivity of the firm. Workers produce better quality goods at much lower prices. There is more competition in the economy which leads to better quality good and hence more choice and innovation in the market. The disadvantage of supply side policies is that the current account is affected by other factors such as the exchange rate and world demand and exogenous shocks. Other methods could be used such as depreciation of the pound, import controls or higher UK taxes in order to solve the UK’s trade deficit.
In conclusion it is clear that the UK’s trade deficit cannot only be solved by the implementation of supply side policies. It can also be solved by some of the above listed. Perhaps a combination of supply-side policies and some of the above would work best.