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

This guide follows the Pearson Edexcel International GCSE Economics (4EC1) specification, Issue 3, February 2026. It covers section 2.2.2 parts a), b) and c): free trade, the reasons for protection, and tariffs, quotas and subsidies with their supply and demand diagrams. It sits in Paper 2 (Macroeconomics and the Global Economy), and there is one tier of entry. Trading blocs, the WTO and trade patterns (parts d to f) are taught separately and are not repeated here.

All figures below are invented and illustrative. They describe a made-up Country A and a made-up tile market, not real statistics.

Useful links: Edexcel IGCSE Economics hub, printable checklist, revision notes, practice questions, the current account, demand, supply and equilibrium and the free 10-minute diagnostics.

What this unit covers

Spec	What you must be able to do
2.2.2 a)	Give advantages and disadvantages of free trade: lower prices and more choice, lower input costs, wider markets, foreign competition harming domestic businesses, rising unemployment
2.2.2 b)	Explain the reasons for protection: prevent dumping, protect employment, protect infant industries, gain tariff revenue, protect consumers from unsafe products, reduce current account deficits, retaliation
2.2.2 c)	Explain tariffs, quotas and subsidies, give advantages and disadvantages of each, and show them on supply and demand diagrams

The market used in every example

Country A buys and makes ceramic tiles. Quantities are in thousand tiles a month and prices in currency units (c).

• Home demand: Qd = 120 − 2P
• Home supply: Qs = 2P + 10
• World price (the price foreign sellers charge): 15 c, and Country A is too small to change it.

Without trade, demand equals supply at 120 − 2P = 2P + 10, so P = 27.5 c and Q = 65 thousand. With free trade, buyers pay 15 c. At 15 c, Qd = 90 and Qs = 40, so Country A imports 50 thousand tiles (90 − 40).

a) Free trade: advantages and disadvantages

Free trade means no tariffs, quotas or subsidies distort trade. Compare the two situations above.

Advantages

• Lower prices and more choice for consumers. Price falls from 27.5 c to 15 c, a fall of (15 − 27.5) ÷ 27.5 × 100 = −45.5%. Consumption rises from 65 to 90 thousand. Foreign varieties also become available.
• Lower input costs. A bakery that imports flour pays the world price. Lower costs shift its supply right, so it can charge less or earn more.
• Wider markets for businesses. Exporters sell to many countries, not only at home. Higher sales can bring economies of scale and lower unit costs.

Disadvantages

• Foreign competition harming domestic businesses. Home tile output falls from 65 to 40 thousand, a fall of 25 thousand. Firms that cannot match 15 c close or shrink.
• Increasing unemployment. If each thousand tiles needs 5 workers, 25 × 5 = 125 jobs go. The specification lists this as a cost of free trade. Be careful in evaluation: those workers may find jobs in expanding export industries, but only after retraining, and perhaps in another region.

Chain of reasoning for a 6-mark style answer: foreign firms sell at lower prices, so home sales fall, so home firms cut output and jobs, so unemployment rises in that industry. Then weigh it: consumers across the country gain, while a smaller group of workers lose heavily.

b) Reasons for protection

Protection means policies that shield home producers from foreign competition. Each reason below needs a short chain of reasoning.

1. Prevent dumping. Dumping is selling goods abroad at a price below the cost of production, or below the price charged at home. Suppose a foreign firm sells tiles in its own market for 14 c and in Country A for 9 c. Home firms are undercut, and may close. Once they have gone, the foreign firm can raise price. An anti-dumping tariff lifts the price back towards a fair level. The drawback is that consumers lose cheap goods while the dumping lasts.
2. Protect employment. A tariff of 3 c raises the home price to 18 c. Home output rises from 40 to 46 thousand, which is 6 × 5 = 30 jobs saved. The cost falls on consumers (see below).
3. Protect infant industries. A new industry has low output and high unit costs. Suppose its unit cost falls with output like this:

Output (thousand)	10	20	30	40	50
Unit cost (c)	24	19	16	14	12.5

With the world price at 15 c, the firm cannot compete until it reaches about 40 thousand. A 20% tariff makes imports cost 18 c, so the firm can survive from output 30 thousand (16 c). Once costs fall below 15 c, the protection can end. The risk is that the firm never becomes efficient and the tariff stays.

4. Gain tariff revenue. Tariff revenue = tariff per unit × imports after the tariff. Here, 3 × 38 = 114 thousand c a month (calculated below). This matters most to governments with few other ways to raise tax. Revenue is not unlimited. With imports = 50 − 4t for a tariff of t:

Tariff per tile (c)	0	3	6	9	12
Imports (thousand)	50	38	26	14	2
Revenue (thousand c)	0	114	156	126	24

Revenue rises, peaks near a 6 c tariff, then falls as imports collapse.

5. Protect consumers from unsafe products. Buyers may not know that a good is unsafe, so a market can supply too much of it. Banning or restricting imports that fail safety standards protects health. The standard should apply equally to home output, or it is just a disguised trade barrier.
6. Reduce current account deficits. A deficit means more money flows out for imports of goods and services than comes in from exports. With the 3 c tariff, imports fall from 50 to 38 thousand. The import bill paid abroad (excluding the tariff) falls from 50 × 15 = 750 to 38 × 15 = 570, a fall of 180 thousand c. The effect is smaller if demand for imports is inelastic, and a deficit caused by weak competitiveness is not cured by a tariff alone.
7. Retaliation. If another country puts a tariff on your goods, you may answer with your own tariff, to punish them and push them to remove theirs. It can start a trade war. Suppose exports of 400 fall 10% after another country retaliates. They become 360, which offsets part of the gain from lower imports.

c) Methods of protection and their diagrams

Tariff (a tax on imports)

A tariff raises the price home buyers pay for the imported good. A 3 c tariff on a 15 c good is a 20% tariff (3 ÷ 15 × 100).

Drawing it. Label the axes Price (vertical) and Quantity (horizontal). Draw downward-sloping demand D and upward-sloping home supply S. Draw a horizontal line at the world price, Pw = 15. Draw a second horizontal line at Pw + tariff, Pt = 18.

Read each horizontal line across to the two curves. S is on the left and D on the right, because the curves cross at 27.5 c, above both lines.

Price line	Cuts supply S at	Cuts demand D at	Imports (gap)
Pw = 15	40	90	50
Pt = 18	46	84	38

Reading the diagram:

• Before the tariff: home supply 40, demand 90, imports 50 (Qs to Qd).
• After the tariff: home supply 46, demand 84, imports 38 (Qs’ to Qd’).
• Tariff revenue = 3 × 38 = 114 (the rectangle between the two lines, across the imports).
• Consumers lose 261: 3 × 84 = 252 as a rectangle, plus a triangle of 9.
• Home producers gain 129: 3 × 40 = 120, plus a triangle of 9.
• Two triangles of 9 each (18 in total) are lost to the country. Check: 129 + 114 + 18 = 261.

Advantages: protects home output and jobs, raises government revenue, can be removed later. Disadvantages: higher prices and less choice for consumers, inefficient home firms kept alive, higher costs for firms using imported inputs, and the risk of retaliation.

Quota (a limit on the quantity of imports)

A quota fixes how many units can be imported. On the diagram, the import gap between demand and home supply is capped, so the price rises until Qd − Qs equals the quota. To draw it, keep D, S and the world price line, then find the higher price line at which the horizontal gap between S and D equals the quota; imports are that gap, and the world price line is no longer the price buyers pay.

Worked example. The government sets a quota of 20 thousand.

1. Imports = Qd − Qs = (120 − 2P) − (2P + 10) = 110 − 4P.
2. Set 110 − 4P = 20, so P = 22.5 c.
3. Qd = 120 − 45 = 75 and Qs = 45 + 10 = 55. Check: 75 − 55 = 20.
4. Price rises by 7.5 ÷ 15 = 50%.
5. The 7.5 c gap between 22.5 and 15 is earned by whoever holds the import licences: 7.5 × 20 = 150 thousand c. The government gets nothing unless it sells the licences.

Advantages: gives a firm limit on imports, which suits a safety or balance of payments aim. Disadvantages: higher prices, no revenue for the government by default, and licence holders can gain at consumers’ expense. Foreign sellers may also supply only the quota at the higher price.

Subsidy (a payment to home producers)

A subsidy to home producers lowers their costs, so the supply curve shifts down (right) by the amount of the subsidy. It makes home goods cheaper without taxing imports.

Worked example. The government pays 3 c per tile.

1. Home firms now receive 15 + 3 = 18 c per tile, so Qs = 2 × 18 + 10 = 46.
2. Consumers still pay the world price of 15 c, so Qd = 90.
3. Imports = 90 − 46 = 44.
4. Cost to taxpayers = 3 × 46 = 138 thousand c.

Compare with the tariff: home output is the same (46), but consumers keep the 15 c price. The cost shifts to taxpayers.

Closed-market version. Home market with no imports: the subsidy shifts supply to Qs = 2P + 16. Setting 120 − 2P = 2P + 16 gives P = 26 c and Q = 68. Price falls from 27.5 to 26 and output rises from 65 to 68.

Advantages: keeps prices low, protects jobs, and leaves the price of imports untouched. Disadvantages: costs taxpayers (opportunity cost), can keep inefficient firms alive, and does not raise revenue.

Choosing and evaluating

	Tariff	Quota	Subsidy
Price paid by buyers	Rises	Rises	Stays or falls
Government	Gains revenue	No revenue	Pays
Who gains the gap	Government	Licence holders	Home firms

When you evaluate, state a judgement. For example: a tariff suits a government that needs revenue, a subsidy suits one that wants to keep prices low, and a quota suits a government that needs a firm limit. Your conclusion should also reflect the time period, the elasticity of demand, and the chance of other countries hitting back.

Common errors

• Calculating tariff revenue on the pre-tariff imports (50) instead of imports after the tariff (38).
• Drawing a tariff as a shift of the home supply curve. It moves the price line the buyers face.
• Saying a quota raises government revenue without mentioning licences.
• Mixing up a tariff per unit (3 c) with a tariff rate (20% of 15 c). State which you are using.
• Listing reasons for protection with no chain of reasoning.

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).