Implications of Trade and Capital Restrictions

Implications of Trade and Capital Restrictions

Trade Restrictions

Governments restrict international trade by imposing trade policies to shield domestic producers from competition. The main types of trade restrictions are discussed below.

Tariffs

A tariff is a type of tax that imposes additional costs on imports. This ensures the protection of upcoming industries and economies that are developing. Tariffs reduce the demand for imports by increasing their prices to a level above the free trade price.

Licenses

A license is granted to a business by the government within whose jurisdiction it operates. It enables the business to import specific goods. By and large, licenses increase the prices of goods and services.

Import Quotas

Import quotas refer to the regulations that restrict the amount of a specific good that can be imported within a specific period of time. The effect of quotas is uncertain since foreign producers can increase the prices of their goods to make higher profits. This, consequently, produces a quota rent.

Voluntary Export Restraints (VER)

This type of restriction is created by the government of the exporting nation. However, these restrictions are often implemented upon the insistence of the importing nations. Voluntary export restraints lead to the deterioration of welfare in the importing country.

Local Content Requirement

The government recommends a percentage of goods to be made within the country. As such, a minimum level of local content is sometimes a requirement under trade laws.

Capital Restrictions

Capital restrictions refer to measures taken by a government or central bank to control the flow of capital. This could be capital flowing in and out of the economy. Controls include taxes, tariffs, volume restrictions, etc. Regulations, on the other hand, include foreign exchange, tax regulation, credit regulation, and investment restrictions.

Capital restrictions and regulations have similar effects as trade restrictions – They protect domestic industries. You should, nevertheless, note the following:

  • Capital restrictions can slow down growth.
  • More restrictions can mean higher domestic prices for goods.

Controls are useful when they enable a government to deal with currency exchange rates and interest rates. Governments benefit from tariffs since they are a type of revenue (tax). Industries benefit from reduced competition since import prices are high. On the flip side, consumers do not benefit because the increase in import prices means higher prices.

The most obvious difference between trade restrictions and capital restrictions is that trade restrictions limit access to a wide range of goods and services. In contrast, capital restrictions limit access to financial markets.

Question

Which of the following is least likely a consequence of open trade?

  1. Increases unemployment.
  2. Strengthens economies.
  3. Increases the choices of goods to buy from.

Solution

The correct answer is A.

Open trade strengthens economies, creates jobs, and increases the choice of goods and services from which one can choose. As such, it does not increase unemployment.

Shop CFA® Exam Prep

Offered by AnalystPrep

Featured Shop FRM® Exam Prep Learn with Us

    Subscribe to our newsletter and keep up with the latest and greatest tips for success
    Shop Actuarial Exams Prep Shop Graduate Admission Exam Prep


    Sergio Torrico
    Sergio Torrico
    2021-07-23
    Excelente para el FRM 2 Escribo esta revisión en español para los hispanohablantes, soy de Bolivia, y utilicé AnalystPrep para dudas y consultas sobre mi preparación para el FRM nivel 2 (lo tomé una sola vez y aprobé muy bien), siempre tuve un soporte claro, directo y rápido, el material sale rápido cuando hay cambios en el temario de GARP, y los ejercicios y exámenes son muy útiles para practicar.
    diana
    diana
    2021-07-17
    So helpful. I have been using the videos to prepare for the CFA Level II exam. The videos signpost the reading contents, explain the concepts and provide additional context for specific concepts. The fun light-hearted analogies are also a welcome break to some very dry content. I usually watch the videos before going into more in-depth reading and they are a good way to avoid being overwhelmed by the sheer volume of content when you look at the readings.
    Kriti Dhawan
    Kriti Dhawan
    2021-07-16
    A great curriculum provider. James sir explains the concept so well that rather than memorising it, you tend to intuitively understand and absorb them. Thank you ! Grateful I saw this at the right time for my CFA prep.
    nikhil kumar
    nikhil kumar
    2021-06-28
    Very well explained and gives a great insight about topics in a very short time. Glad to have found Professor Forjan's lectures.
    Marwan
    Marwan
    2021-06-22
    Great support throughout the course by the team, did not feel neglected
    Benjamin anonymous
    Benjamin anonymous
    2021-05-10
    I loved using AnalystPrep for FRM. QBank is huge, videos are great. Would recommend to a friend
    Daniel Glyn
    Daniel Glyn
    2021-03-24
    I have finished my FRM1 thanks to AnalystPrep. And now using AnalystPrep for my FRM2 preparation. Professor Forjan is brilliant. He gives such good explanations and analogies. And more than anything makes learning fun. A big thank you to Analystprep and Professor Forjan. 5 stars all the way!
    michael walshe
    michael walshe
    2021-03-18
    Professor James' videos are excellent for understanding the underlying theories behind financial engineering / financial analysis. The AnalystPrep videos were better than any of the others that I searched through on YouTube for providing a clear explanation of some concepts, such as Portfolio theory, CAPM, and Arbitrage Pricing theory. Watching these cleared up many of the unclarities I had in my head. Highly recommended.