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KRUGMAN’S Economics for AP® S E C O N D E D I T I O N

Section 8 Module 44

What You Will Learn in this Module Explain the pros and cons of protectionism Illustrate the effects of a tariff and an import quota Section 8 | Module 44

Trade Restrictions Remember, specialization and trade make larger quantities of goods and services available to consumers. Every country now has an open economy, although some economies are more open than others. Some factors that affect a country’s approach to trade: Transportation costs Fear of becoming reliant upon another country National pride Casualties of trade: lost jobs/increased structural unemployment Section 8 | Module 44

Trade Restrictions Section 8 | Module 44

Trade Restrictions Protectionism is the practice of limiting trade to protect domestic industries. Primary tools of protectionism: Tariffs Import quotas Section 8 | Module 44

Tariffs Tariffs are taxes on imports Can make prices higher for domestic consumers Can spark trade wars In U.S., 1% of federal government revenue comes from tariffs Consider hypothetical U.S. market for ceramic plates Section 8 | Module 44

Tariffs The U.S. Ceramic Plate Market with Imports Section 8 | Module 44

Tariffs A Tariff on Ceramic Plates Section 8 | Module 44

Quotas An Import Quota is a limit on the quantity of a good that can be imported within a given period. Restricting supplies, reduces equilibrium quantity and increases the equilibrium price. Result is higher prices for domestic consumers Consider, again, hypothetical U.S. market for ceramic plates Section 8 | Module 44

Quotas A Ceramic Plates Quota Section 8 | Module 44

F Y I Bringing Down the Walls Section 8 | Module 43

Summary Protectionism is the practice of limiting trade to protect domestic industries. Tariffs are taxes on imports. While helping domestic industry, they provide a revenue for the government. Import quota is a limit on the quantity of a good that can be imported within a given period. Section 8 | Module 44