Question

Unfair Trade A global recession has hit and you are the economic advisor to a country with a struggling economy and rising unemployment. Your country has a long history of trading with different nations, but due to the recession, labor and business groups are becoming ever more rabid in their pleas for the government to strengthen and enforce trade restrictions. The labor groups argue that too many businesses are trying to cut costs by replacing domestic workers with cheaper foreign labor. At the same time, businesses are claiming that they are losing consumers due to foreign products flooding the markets. What do you do? a. Using what you know about supply and demand, what would happen to the equilibrium price and quantity of any good if you shut the borders to all foreign products? b. What would happen to the cost of production for businesses if you required them to only hire domestic workers and only use domestic capital? What would happen to the prices consumers faced? c. What would happen to the demand for your country's exports in the rest of the world if you refused to buy any other country's exports? d. Based on your answers to a, b, and c, what is the effect of trade restrictions on the economy? What do you tell the interest groups?

Answer 1

a) If there is cheaper foreign workers and the expensive domestic workers, with the shutting down of the cross borders it would help to restrict the foreign workers coming and getting more jobs in the domestic industry. The forms would either curtail the production or hire the domestic workers who are expensive and high cost. With the more jobs, it would help in earning more and there would be high production and consumption leading to a higher multiplier effect on the economy

b) The prices would surge, as the domestic workers and the capital is expensive. It would lead to higher cost items and products would be sold. But as the domestic workers are getting wages and earning, they would also spend and it would increase the more multiple effects of the economy.

c) If we refused to buy any other country’s exports, the other foreign countries would also restrict their purchase of exports or if the product is a necessary item which is available in a limited capacity, the foreign country has to purchase it. It would lead to more foreign exchange earnings and currency.

d) Trade restrictions within the economy can lead to the pro-producer and anti-consumer effects along with causing the barriers to the businesses, consumers and subsequently facing the government consequences and shifts. While in the short run the economy would experience higher-priced goods and services but at the same time would reduce the consumption of the individual consumers along with the businesses. The problem of the trade barriers is experiencing the tariffs, based on the economic harm than benefit; which would lead to higher prices and would affect the and reduced employment, along with the lower economic output.