Confirm or refute the statement: “Trade restrictions encourage world trade, contracting the total number of goods and services produced”

I disagree with the statement «Trade restrictions encourage world trade, contracting the total number of goods and services produced». In my opinion, trade restrictions limit world trade, reducing the total number of goods and services produced. Trade restrictions also raise prices.

Many nations impose limits on trade. There are four main types of trade restrictions: tariffs, subsidies, quotas and cartels.

The tariff is a tax placed on imported goods, but it's best for nation to use tariffs, because they provide domestic job protection and aid industrial development.

A subsidy can be thought of as а tariff in reverse. Instead of taxing the foreign product, the government gives а subsidy to the industry that is suffering from foreign competition.

A nation also can limit the amount of goods that can be imported into the country. It's called a quota.

Sometimes a group of companies or country band together to restrict competition. It's called a cartel. The members of the cartel agree to limit the supply and control the price of a particular good.

Trade restrictions limit the number of imported goods and reduce their diversity and competition between sellers in the country. Thus domestic producers can inflate the price and sell low quality goods.

 

Try to account for the existence of the main types of trade restrictions, say what impact they have on international trade and national economies.

Trade restrictions limit world trade, reducing the total number of goods and services produced. Trade restrictions also raise prices.

That's why there is an international organization as GATT (General agreement on Tariffs and Trade), which members met periodically in an effort to lower tariffs and settle trade disputes. The GATT also restricted member countries from banning or limiting imports from the other participants.

Analyze the case when in 1980s when the strong dollar caused severe problems for the US economy. Describe how the cost competitiveness of domestic produce decreased and what measures were taken to control inflation.

Inflation is generally controlled by the Central Bank and/or the government. The main policy used is monetary policy (changing interest rates). However, in theory, there are a variety of tools to control inflation including:

1. Monetary policy – Higher interest rates reduce demand in the economy, leading to lower economic growth and lower inflation.

2. Control of money supply – Monetarists argue there is a close link between the money supply and inflation, therefore controlling money supply can control inflation.

3. Supply-side policies – policies to increase the competitiveness and efficiency of the economy, putting downward pressure on long-term costs.

4. Fiscal policy – a higher rate of income tax could reduce spending, demand and inflationary pressures.

5. Wage controls – trying to control wages could, in theory, help to reduce inflationary pressures. However, apart from the 1970s, it has been rarely used.

In 1980 in the Us in order to combat rising inflation, recently appointed chairman of the Federal Reserve, Paul Volcker, elected to increase the federal funds rate. In order to combat rising inflation, recently appointed chairman of the Federal Reserve, Paul Volcker, elected to increase the federal funds rate. This caused an economic recession beginning in January 1980, and in March 1980, President Jimmy Carter created his own plan for credit controls and budget cuts to beat inflation. In order to cooperate with these new priorities, the federal funds rate was lowered considerably from its April peak. Later Ronald Reagan, who had assumed office in January 1981, brought his own economic plan to the table. In August 1981, the president signed the Economic Recovery Tax Act of 1981, a three-year tax cut plan. In July 1983, the official end of the recession was announced as November 1982.

Cost competitiveness is influenced by the inflation rate, the cost of basic services, infrastructure costs, access to raw resources, transport costs, the value of the currency, and labour and productivity levels.

The strong dollar caused severe problems by decreasing the cost competitiveness of United States exports. The rise of the dollar was associated with a large rise in the production costs of United States firms relative to foreign competitors. This rise in relative costs has at least temporarily reduced the international competitiveness of United States industry dramatically.