Why do governments often intervene in international trade to restrict imports and expand exports?
What will be an ideal response?
Governments may intervene in trade between nations because they mistakenly think of exports as helpful and imports as harmful for a national economy. In fact, there are important gains from trade in the form of the extra output obtained from abroad. Trade makes it possible to obtain a product at a lower cost than would be the case if they were produced using domestic resources, and the earnings from exports help a nation pay for these lower-cost, imported products. Another reason why governments interfere with free trade is based on political considerations. Groups and industries seek protection from foreign competition through tariffs and import quotas, or other kinds of trade restrictions. The costs of trade protectionism are hidden from consumers of the protected product so there is little opposition to demands for protectionism.
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The best estimate for the size of overseas trade as a proportion of national income in 1774 is:
a. 0%-5%. b. 15%-20%. c. about 50%. d. 70%-75%.
Assume that the world price of Commodity X is $9 per unit while its domestic price is $8, and the marginal cost of production is $6 per unit. If the government imposes a price ceiling of $7 on domestic output:
a. the import of Commodity X from the world market would stop. b. the world price of Commodity X would decline. c. a surplus of Commodity X would accumulate in the domestic market. d. a shortage of Commodity X would be observed in the domestic market.