Pearson Edexcel International GCSE Economics: Free trade and protection diagrams (4EC1) – Revision Notes

These notes condense section 2.2.2 a), b) and c) of the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3, February 2026: free trade, reasons for protection, and tariff, quota and subsidy diagrams. The topic sits in Paper 2 (Macroeconomics and the Global Economy), with one tier of entry. The full explanations and the tile-market worked example are in the study guide. Practice follows in the practice questions.

Other links: Edexcel IGCSE Economics hub, checklist, the current account and the free 10-minute diagnostics. Trading blocs, the WTO and trade patterns are not covered here.

All figures are invented for illustration (a made-up Country B and its bicycle market).

Key definitions

Term	Meaning
Free trade	Trade between countries with no tariffs, quotas or subsidies distorting it
Protection (protectionism)	Policies that shield home producers from foreign competition
Dumping	Exporting at a price under the cost of making the good, or under the price in the exporter’s own market
Infant industry	A young industry whose unit costs are still high, so it cannot yet match rivals
Tariff	A tax on imported goods
Quota	A limit on the quantity of a good that can be imported
Subsidy	Government money paid to producers, which cuts what each unit costs them to supply
Retaliation	Answering another country’s trade barrier with one of your own
Current account deficit	Money paid out for imports of goods and services exceeds money received for exports

Free trade at a glance (2.2.2 a)

Advantages	Disadvantages
Lower prices and more choice for consumers	Foreign competition harming domestic businesses
Lower input costs for firms	Increasing unemployment in affected industries
Wider markets for businesses

Link each point to a chain: lower prices, so higher real incomes; lower input costs, so supply shifts right; wider markets, so higher sales and possibly economies of scale. For the disadvantages: cheaper foreign goods, so lower home sales, so output and jobs fall.

Reasons for protection (2.2.2 b)

Reason	One-line chain
Prevent dumping	Cheap foreign goods undercut home firms, who close, then prices rise; a duty restores fair competition
Protect employment	Higher import price, so higher home output, so more jobs, but consumers pay more
Infant industries	Temporary shelter while scale cuts unit costs
Tariff revenue	Revenue = tariff per unit x imports after the tariff; it falls if the tariff is too high
Unsafe products	Buyers lack information, so imports that fail standards are restricted
Current account deficits	Fewer imports, so a smaller import bill; weaker if demand is inelastic
Retaliation	Punish a partner’s tariff, but may start a trade war

Methods of protection (2.2.2 c)

Method	Effect on price	Who gains	Who loses
Tariff	Rises by the tariff	Home firms, government	Consumers, foreign exporters, firms using imports
Quota	Rises until imports equal the quota	Home firms, import licence holders	Consumers, overseas sellers shut out by the limit
Subsidy	Home price unchanged or falls	Home firms, consumers	Taxpayers

Diagram reminders. Axes: price (vertical) and quantity (horizontal). Draw demand D and home supply S. Draw the world price Pw as a horizontal line.

• Tariff: draw a second line at Pw plus the tariff. Home supply and demand are read on the new line, and imports are the gap between them.
• Quota: the price rises until the gap between D and S equals the quota.
• Subsidy: S shifts down (right) by the subsidy per unit. In an import market, home firms receive Pw plus subsidy.

Method in steps

Tariff or quota calculation

1. Write the demand and supply schedules, or read the quantities off the table.
2. Find the price consumers pay (world price plus tariff, or the price that gives the quota).
3. Read home demand and home supply at that price.
4. Imports = demand minus home supply.
5. Revenue = tariff per unit x imports. Quota rent = (new price minus world price) x quota.
6. Convert to a percentage if asked: change divided by original, times 100.

Worked reminder: Country B bicycles

Demand Qd = 160 − 3P and supply Qs = 2P + 20, in thousand bicycles a month. The world price is 20 c.

1. Free trade: Qd = 100, Qs = 60, so imports = 40.
2. A 25% tariff is 0.25 x 20 = 5 c, so the price is 25 c.
3. Qd = 160 − 75 = 85 and Qs = 50 + 20 = 70, so imports = 15.
4. Revenue = 5 x 15 = 75 thousand c.
5. A quota of 25 thousand: imports = (160 − 3P) − (2P + 20) = 140 − 5P. Setting 140 − 5P = 25 gives P = 23 c. The price rise is 3 ÷ 20 = 15%, and quota rent is 3 x 25 = 75 thousand c.
6. A subsidy of 4 c per bicycle: home firms receive 24 c, so Qs = 68 (up 8). Cost = 4 x 68 = 272 thousand c.

Who gains and loses from the 25% tariff

Group	Change (thousand c a month)
Consumers	Lose 462.5 (5 x 85 = 425, plus a triangle of 37.5)
Home producers	Gain 325 (5 x 60 = 300, plus a triangle of 25)
Government	Gains 75
Lost to the country	62.5 (triangles of 25 and 37.5)

Check: 325 + 75 + 62.5 = 462.5. At 4 workers per thousand bicycles the tariff protects 40 jobs, so consumers lose about 11.6 thousand c for each job protected (462.5 ÷ 40). Use this kind of figure to weigh the employment argument, noting that part of the loss is passed to firms and the government rather than destroyed.

Infant industry and dumping in two lines

• Infant industry. A bicycle maker has a unit cost of 24 c at low output, 20% above the 20 c world price. Protection is justified only if its cost is expected to fall to the world price or below, and if the protection has an end date.
• Dumping. A foreign firm charges 12 c in Country B but 16 c in its own market. The gap is 4 ÷ 16 = 25% of the home price. An anti-dumping duty of 4 c lifts the import price back to 16 c.

Must-know distinctions

• Tariff against quota: a tariff acts on price and raises revenue; a quota acts on quantity and the gap goes to licence holders unless the licences are sold.
• Tariff against subsidy: a tariff makes buyers pay more; a subsidy makes taxpayers pay.
• Dumping against cheap imports: cheap imports reflect lower costs; dumping is a price below cost or below the home price.
• Revenue against protection: a tariff that raises plenty of revenue still lets imports in; one that stops imports raises none.
• Short run against long run: protection can save jobs now but may weaken efficiency later.

Evaluation frame

1. State the benefit with a chain of reasoning.
2. State the cost, and who bears it.
3. Add a condition: how long, how elastic demand is, whether others retaliate.
4. Give a supported judgement.

Quick self-test

Use the Country B data above where numbers are needed.

1. Define dumping.
2. A tariff of 6 c is placed on a good with a world price of 24 c. What is the tariff rate?
3. How many bicycles does Country B import under free trade?
4. After the 25% tariff, what is the change in home output?
5. If each thousand bicycles needs 4 workers, how many jobs does the 25% tariff protect?
6. State two disadvantages of free trade.
7. Country B spends 700 on imports and earns 640 from exports. Find the balance. Imports then fall 10%. What is the new balance?
8. In question 7, exports also fall 5% because of retaliation. What is the balance now?
9. Explain why a quota may not raise government revenue.
10. State one reason why a tariff may raise less revenue than expected.

Answers

1. Selling goods abroad below the cost of production, or below the price charged at home.
2. 6 ÷ 24 x 100 = 25%.
3. 100 − 60 = 40 thousand.
4. 70 − 60 = 10 thousand more.
5. 10 x 4 = 40 jobs.
6. Any two: foreign competition harming domestic businesses; increasing unemployment; loss of industries that cannot match world prices.
7. 640 − 700 = −60 (a deficit of 60). Imports become 630, so 640 − 630 = +10 (a surplus).
8. Exports become 640 x 0.95 = 608, so 608 − 630 = −22. Retaliation turns the surplus back into a deficit.
9. The gap between the home price and the world price goes to whoever holds the import licences, not the government, unless the government sells them.
10. The higher the tariff, the fewer the imports, so the tax base shrinks. At very high tariffs, imports fall to almost nothing.

Where marks are usually lost

• Listing a reason for protection with no chain of reasoning.
• Using the original imports instead of imports after the tariff in a revenue calculation.
• Showing a tariff as a shift of the supply curve, not a higher price line.
• Forgetting that in the small-country model the world price does not fall, so home consumers bear the whole tariff.
• Evaluating with a one-sided answer: protection helps some groups and hurts others.
• Missing units, such as thousand units or currency units.
• Writing that a subsidy is free. Taxpayers pay.

Official syllabus

Pearson Edexcel International GCSE in Economics (4EC1) specification, Issue 3, February 2026, for first teaching September 2017, published by Pearson Education Limited. Section 2.2.2 a), b) and c).