Macroeconomics concepts and applications

Economics

Macroeconomics

Many companies produce for foreign markets as well as for markets in their home country. Exports are the goods and services that are sold in foreign markets. Imports are goods or services that are bought from foreign producers. In spite of the benefits of international trade, a lot of nations put limits on trade for a variety of reasons (Trade Restrictions and Their Effects, n.d.). The main types of trade restrictions are tariffs, quotas and embargoes.

A tariff is a tax put on goods that are imported from abroad. The effect of a tariff is to increase the price of the imported product. It helps domestic producers of comparable products to sell them at higher prices. The money received from the tariff is collected by the domestic government. A quota is a limit on the quantity of goods that can be imported from a foreign country. Placing a quota on a good generates a shortage, which causes the price of the good to increase and permits domestic producers to increase their prices and to increase their production. A quota on a product, for example, might limit foreign-made products to 10,000,000 units a year. If Americans buy 200,000,000 units of this product each year, this would leave most of the market to American producers. An embargo stops exports or imports of a product or group of products to or from another country. Sometimes all trade with a country is stopped, usually for political reasons (Hall, 2011).

All of these programs limit world trade, which means there is a decrease in the total number of goods and services that are produced. They shift production from more effective exporting producers to less effective domestic producers. When production is decreased there are fewer workers earning wages. Trade restrictions also raise prices, which is frequently their main purpose. Trade limits in one country, in addition, usually lead to limits being placed in other countries. If the United States places a high tariff on cars made in Japan, for instance, Japan may then put tariffs on American goods sold in Japan. In spite of these disadvantages, countries are tempted to use trade restrictions in order to protect their own industries. Countries that are just getting started often use tariffs, quota, and embargos to protect their industries until they can compete without government help. The difficulty with this infant industry argument in support of trade restrictions is that it is not always possible to foresee which industries will do well. For this reason protection frequently lasts long after the industry has matured (Trade Restrictions and Their Effects, n.d.).

Governments are enthusiastic to protect what are called strategic industries. These have included in the past industries, such as steel, cars and chemicals. Today, they are more often the high tech, high wage industries like commercial aircraft production. One way of assuring that they remain strong is to protect them from foreign competition. Agriculture is another area that a lot of governments try to protect. Tariffs help make sure that domestic farmers can earn enough profits to continue farming. The decision to use trade restrictions like tariffs is an important one. Tariffs help some domestic industries, but they mean higher prices for consumers. They help the owners and workers in the protected industries. They hurt the people who have to pay higher prices for the goods those industries produce. Reducing imports reduces the income of foreigners. They will reduce their foreign purchases, hurting exporting industries and workers in the country that put the tariff on the imports (Trade Restrictions and Their Effects, n.d.).