Explain what is meant by the term "barriers to trade;" use examples. (10)
In order to understand what we mean when we say "barriers to trade" we must first grasp the idea of international trade and free trade which is what these "barriers" are preventing. International trade is made up of imports (M) and exports (X), and is one of the components of aggregate demand (X-M). For some economies, international trade is an extremely significant contributor to GDP, as they have goods and services which they can sell to rest of the world (exports). There can be an improvement in economic welfare if countries specialise in the products in which they have a comparative advantage, due to an abundance of certain resources for example, and then they trade with other nations. Trade also allows countries such as the United Kingdom to import goods that we can either not produce or are cheaper elsewhere.
Barriers to trade can be categorised into tariff barriers and non-tariff barriers. Tariff barriers include tariffs, subsidies, quotas and embargoes; they all directly manipulate the price of imports/exports. Non-tariff barriers are anything else that reduces trade, without directly manipulating price, e.g. Regulation of Goods, Political influence or product differencial. Tariffs are effectively taxes on importing certain goods, therefore increasing the price of that good and reducing demand. Quotas are a physical limit on the quantity imported of a good, decreasing supply and again causing prices to rise. Embargoes are and outright ban of a certain good thus completely stopping trade of a certain good/country. Subsidies, rather than increasing the price of the traded good, they decrease the price of the domestic good. For example, when the government gives money to domestic farmers, their costs fall resulting in a fall in price and an increase in domestic demand and so reducing the competitiveness of international firms. The effect of tariff barriers can be shown in the...
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