Question

How do trade barriers affect the average income level in an economy?

Short answer

By increasing the price level in the economy, it reduces real income.

Step-by-step solution

Step 1. Introduction 

Trade barriers refer to the restrictions imposed by the government on the trade of certain goods and services with the motive of protecting domestic consumers and producers. Tariffs, quotas, standards, etc. are examples of trade barriers.

Step 2. Explanation

Trade barriers create a reduction in the inflow of goods and services in the economy. This reduction in the supply of imports causes the price level to increase. As the price level increases, the real income of consumers declines because of a reduction in their purchasing power.

Trade barriers restrict the use of the comparative advantage. The workers in protected industries can have an advantage but other industries are harmed through reduced demands, the decline in wages, and job loss. Thus, the average level of wages earned by workers also declines.