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IGCSE Economics Self

Assessment Chapter 37
Answers
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Cambridge IGCSE and O Level Economics

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Chapter 37: Free trade and
protection
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Suggested answers to individual and group activities
Twitter
Group activities


1 Increase globalisation: b, c, d and e.
Reduce globalisation: a.
2 a, b, d and e.

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Individual activities
1 a Free trade reers to the ree movement o products across national boundaries. In such a
case, there are no restrictions on the products bought and sold by irms and consumers to
other countries.
b A tarif and a quota. A tarif is a tax on imports and a quota is a limit on the quantity o goods
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can be imported.
2 a Dumping is the sale o products in a oreign market below cost price.
b Imposing import taxes on oreign steel products will raise their price. The impact o levying
these duties will depend on the level they are set at. I they are set at a high level, they will
make it dificult or oreign irms to sell their steel products to India. 1
c The Indian steel industry may collapse. Other countries may enjoy a comparative advantage
in steel production or may be, unairly, undercutting Indian irms.

Suggested answers to multiple choice questions and

four-part
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Multiple choice questions
1 A
Employing local people will create jobs and may raise incomes. B, C and D are all possible
disadvantages o having an MNC producing in a country.
2 B
Increasing a quota limit would mean that more imports are being allowed into the country. A, C
and D would all increase trade restrictions.
3 A
Imposing a tarif on manuactured goods will raise their price. Consumers will have to pay more
or them, which will raise the cost o living. A tarif is also a source o government tax revenue.
4 C
I inant industries have the potential to gain a comparative advantage, they may lourish and
make an important contribution to the economy’s output, employment and trade position. A and
B are reasons or not supporting an industry. D is the declining industry argument.

© Cambridge University Press 2018

___

Cambridge IGCSE and O Level Economics

Four-part question
a An inant industry is a newly established industry that is not yet able to compete with oreign
established industries.
b Free trade gives irms access to a large market. This may enable them to produce on a large scale
and so take advantage o economies o scale. Lowering costs o production and selling a higher
output may increase their proits.
Free trade also gives irms a greater choice o where to buy their raw materials rom. This may
mean that they can get them at a lower price and they may be o higher quality. In turn, these
advantages will result in irms producing products at a lower cost and o a higher quality. Again,
sales and proits would be expected to rise.
c A tarif is a tax on imports or exports. To prevent oreign irms rom selling their products at
below cost price, a government may impose an import tarif on them. The tarif is the equivalent
o an extra cost. Beore domestic irms may have been producing the product at an average cost
o $10 and selling the product at $11. Foreign irms may have been selling it at $9, even i it was
costing them $12 each to produce it. Their motive may have been to capture the market and then
drive up the price. I the government then sets the tarif at a level based on how much the oreign
irms were undercharging, that is 3, the oreign and domestic irms would then be competing in
the country’s market on equal terms. Such a move would be expected to discourage dumping.
d A multinational company (MNC) is one that produces in more than one country. A oreign MNC
can bring beneits to a developing country but it may also bring some disadvantages.
A MNC may create employment by hiring local workers. I the presence o a MNC does raise
employment, it will be likely to reduce unemployment in the country. A MNC may pay higher
wages than domestically owned irms and provide high-quality training or staf. MNCs can make
a considerable contribution to a country’s GDP and exports.
2
MNCs can also introduce new management ideas and new technology into a country. Domestic
irms can pick up on these ideas and technology and may receive orders rom the MNCs or
goods and services.
MNCs also contribute to tax revenue and may help to build inrastructure such as roads and
ports, and to improve energy supplies. Higher tax revenue will enable a government to spend
more on health and education, which should boost economic growth and development.
Improved inrastructure is likely to reduce costs o production and increase the country’s
international competitiveness.
MNCs’ investment in other countries, however, is not always beneicial. The top jobs in the MNCs
may go to workers rom the parent countries o MNCs. I MNCs are producing products made by
domestic irms, they may cause some domestic irms to go out o business. I this is the case, the
MNCs may not add to employment and, in act, may reduce it. MNCs may pay higher wages than
most o the other irms in the country, but the wages may still be lower than what they pay in
their home countries.
The working conditions may not always be that good. One reason that a MNC may set up
a actory or ofice abroad is to get around strict health and saety regulations at work and
pollution limits at home. I a MNC accounts or a signiicant proportion o the host country’s
GDP and employment, it will be in a powerul position while making negotiations with the host
government. It may use this bargaining power to block moves aimed at improving the working
conditions and reducing pollution.
Another possible motive o a MNC may be to obtain raw materials. There is a risk that it will
deplete the country’s non-renewable resources quickly and then move to another country. It may
also not contribute much to tax revenue and domestic income, i it sends most o its proits to its
home country.

© Cambridge University Press 2018

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