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Trade deficit and protectionism

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1. What are the arguments in favor of trade restrictions, and what are the counterarguments? According to most economists, do any of these arguments really justify trade restrictions? Explain.

2. State what, if anything, each of the following does to the supply or demand of loanable funds.

a. net capital outflow increases at each interest rate

b. domestic investment increases at each interest rate

c. the government deficit increases

d. private saving increases

3. What effect do protectionist policies have on the trade deficit?

4. Explain why policy lags could make stabilization policies counterproductive.

5. Describe three costs of inflation.

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Solution Preview

1. Trade restrictions are generally implemented at the behest of industries. Industries can put considerable pressure on political candidates, and therefore often succeed in convincing them to enact trade restrictions. These restrictions essentially take money from consumers and give it to the industry, and cause a loss in total social welfare. But, because consumers are not organized and each consumer pays so little extra, in general, they remain in effect. The argument that these industries need to be protected until they mature (the "infant industry" argument) is the only one that makes sense. If, after reaching maturity, it still cannot compete internationally, there is no rational argument to support trade restriction.

The "infant industry" policy has in fact been implemented successfully. Both the US and Germany used tariffs to protect their fledgling industries during the Industrial Revolution from their more efficient competitors in Britain. Once the industries were established, the tariffs were removed.

The primary argument against this policy is ...

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Protectionism and other implications of international trade

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