Professional Documents
Culture Documents
Vs Protection
3,000 F
C
A
2,200
2,000 B
Production
Possibilities
M Frontier
1,000 D
The only way of getting more of one good is to get less of the other
Opportunity costs
4,000
3,000
2,300 G
2,200
A
0
600 650 1,000 Quantity of
Cars Produced
Check on monopolies:
• It promotes competition and prevents monopolistic tendencies.
• The fear of foreign competition does not permit the producers at home
to form monopolies and exploit the consumers by raising the prices of
their products.
Arguments against Free trade:
• Unrealistic policy: Assumption of laisseez-faire /govt. non-intervention/
• Perfect competition-Free entry and exit
• Non-cooperation of countries:import restriction/gain by some while loss by other.
• Economic Dependence: For essential commodities.
• Unbalanced development:Sectors developed over which the country has
comparative advantage.
• Dumping
Protection
• It refers to the policy of encouraging the home industries by giving subsidies to the home
producers and by imposing duties on the foreign goods by raising their prices relative to those
of domestically produced goods.
• Economic Arguments:
Infant Industry Argument:
• The operational cost of the infant industries are very high./
SOL: Imposition of Tariff on imports
• Protection ,how long?”
• A baby is to be nursed,a child is to be protected;and the grown up young one is to be
left free.” (List)
• Infant industry argument may not be against free trade policy fully./It favors free
trade based on potential(or long run), and not present, comparative advantage.
• Based on the realistic conditions of unrealised internal and external economies of
scale.
Internal Economies:Firms can grow upto
optimum level
External Economy: It helps to reduce costs of all
firms by creating a trained labour force or by
spreading knowledge of production tecniques.
Is there any scope to generalise ‘infant industry
argument ‘ to ‘infant country argument’?
Industrialisation: sound infrastructure/growth of sizeable
labour force with the requisite attitude of skills, thus
enabling the infant developing country to industrialise
itself.
Negative Implications:
Protection may lead to political corruption:
YET !!!!
No discouragement in terms of total consumption by raising the
price.
Consumers pay only $300 per unit
Consumers do not lose the additional Area ‘d’
In terms of Area gain is ‘g’ and loss is ‘b’
Why there is a loss
Area ‘b’ [loss] is due to the subsidy borne by the Govt.
Table: Protection to Maintain Jobs, the United States
National Defense
• A country must have access to products to maintain
the national defense, especially because imports may
not be readily available during times of hostilities.
• Apply the specificity rule:
• Some products can be kept in stockpiles. In this case,
imports during peacetime can be used to build the
stockpiles.
• National production capabilities are needed for other
products. Best to use a subsidy to building or
maintaining national production capabilities.
Can an Import Barrier Be Better Than Doing Nothing, and Is
It the Best Policy?
Diversification of Industries Argument:
Excessive specialisation leads to too
much dependence on foreign
trade/risky and undesirable during war
time.
Economically dependence on a few
industries may result in serious
economic dislocation in times when
such industries pass through adverse
circumstances.
National self-
sufficiency
Smooth and balanced
growth of the economy