Question

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

Short answer

Average income falls.

Step-by-step solution

Step1. Introduction

Trade barriers refer to restrictions which are imposed in terms of tariffs, quotas, etc to protect the domestic producers from the foreign competition.

Step2. Explanation

Trade barriers increase the prices of the goods in the protected industries as they make imports expensive. Since these lead to good profits, the wages of the protected industry labor shall increase.

If these goods are used as inputs for some other industries, their cost of production will increase leading to a rise in price. As a result, their sales will fall, further lowering the employment levels.

If the goods of the protected industry are consumer goods, the prices are high so their aggregate demand for all the goods shall be affected and hence fall. This shall further cut down employment rates.

As a result of low employment rates, the wages shall fall down due to less demand of labor and supply being more or less constant.

Hence, the average wages in the economy shall fall.

Since the average wages fall, the average income level of an economy falls too.