The previous chapter pointed out that, because faster capital formation comes at a cost (reduced current consumption), it is possible for a country to invest too much.

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The previous chapter pointed out that, because faster capital formation comes at a cost (reduced current consumption), it is possible for a country to invest too much.

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The previous chapter pointed out that, because faster capital formation comes at a cost (reduced current consumption), it is possible for a country to invest too much. Suppose the government of some country decides that its businesses are investing too much. What steps might it take to slow the pace of capital formation?

Answer & Explanation (1)

Explanation
Trade wars occur when a country tries to restrict imports of a particular country or countries. A country can do this either by putting high tariffs on imports or using other non-tariff methods such as setting lofty quality standards.

If Country U imposes tariffs on Country C's imports, the tariff (tax on imports) makes imports expensive as compared to the domestic products. This makes imports unattractive and their reduced demand hurts the exporting Country C. Tariffs have their side-effects in the form of low efficiency and higher prices as a result of lower competition in the imposing country, that is Country U. If Country C retaliates, Country U exports would suffer causing it economic losses and the side-effects of the tariff will be faced by Country C. Both countries suffer in the trade war.

Verified Answer
Weapons used in trade wars include tariffs, quotas, and other non-tariff barriers to trade.

These weapons will not only hurt other countries in terms of reduced exports but also Country U because most of these weapons (majorly tariff methods) will also have some side-effects on the economy of Country U.

Retaliation by another country will cause trade conditions to worsen and cause both the countries to undertake further losses.

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