Resources | Revision Questions | Economics
Click on a question to view the answer
Some economists argue that subsidies are an inefficient method of protection. Discuss this argument, considering the potential alternatives and the reasons why governments might still choose to use subsidies.
The argument that subsidies are inefficient stems from the fact that they can distort market signals and lead to misallocation of resources. By artificially lowering the cost of production for domestic firms, subsidies can encourage them to continue operating even if they are not the most efficient producers. This can lead to:
Potential Alternatives to Subsidies:
Reasons why governments might still choose to use subsidies:
While subsidies may be inefficient, governments often perceive them as a necessary tool for achieving broader economic and social goals. The decision to use subsidies involves a trade-off between economic efficiency and other policy objectives.
Question 1: Discuss how changes in trade restrictions have influenced the level of globalisation in recent years. Consider specific examples to support your answer.
Changes in trade restrictions have been a significant driver of globalisation. Historically, high tariffs, quotas, and other barriers limited international trade, hindering the flow of goods, services, and capital. However, over the past few decades, a general trend towards reduced trade restrictions has fuelled globalisation.
Reduced Tariffs: The General Agreement on Tariffs and Trade (GATT), later replaced by the World Trade Organization (WTO), has played a crucial role. Through successive rounds of negotiations, member countries have progressively lowered tariffs on a wide range of goods. For example, the Uruguay Round (1986-1994) significantly reduced tariffs on manufactured goods, textiles, and agricultural products. This has made international trade cheaper and more accessible, encouraging businesses to expand into new markets and consumers to access a wider variety of goods.
Trade Blocs: The formation of trade blocs like the European Union (EU), North American Free Trade Agreement (NAFTA) (now USMCA), and ASEAN has also reduced trade restrictions. Membership in these blocs typically involves the elimination or reduction of tariffs and other barriers among member countries. This creates larger, integrated markets, fostering economies of scale and increased trade flows. The EU, for instance, has facilitated the free movement of goods, services, capital, and people among its member states, significantly boosting trade within the bloc.
Trade Agreements: Beyond trade blocs, bilateral and multilateral trade agreements have further reduced trade restrictions. These agreements often include provisions for dispute resolution, investment protection, and intellectual property rights, creating a more stable and predictable trading environment. The proliferation of such agreements has contributed to a significant increase in global trade volumes.
Examples: The rise of China as a major trading nation is a direct consequence of reduced trade restrictions. China's accession to the WTO in 2001 was a watershed moment, granting it access to global markets and encouraging it to open up its economy to foreign investment and trade. Similarly, the growth of global supply chains is facilitated by reduced tariffs and other barriers, allowing companies to source components and manufacture products in different countries.
In conclusion, the reduction in trade restrictions has been a major catalyst for globalisation, leading to increased international trade, investment, and economic integration. While some barriers remain, the overall trend has been towards a more open and interconnected global economy.
Question 2: Assess the advantages and disadvantages of using trade restrictions to protect infant industries.
Using trade restrictions to protect infant industries has both potential advantages and significant disadvantages.
Advantages:
Disadvantages:
Therefore, while protection can offer short-term benefits, the long-term disadvantages often outweigh the advantages. A carefully planned and time-limited approach is crucial to minimise the risks.