Question

"Physical obstacles like bad roads and stormy weather increase transaction costs and thereby reduce the volume of trade. Tariffs, quotas, exchange rate controls, and other human-made trade restrictions have similar effects." Evaluate this statement. Is it true? Why or why not?

Answer 1

"True"

Consider a backward state in Africa with extensive forest reserve which they can cut and sell timber to the US market. But the only problem is that half of those forest doesn't have any access to road and infrastructure. IN such a scenario the cost of getting timber from the areas where the state doesn't have any road will be very high and this increased cost will increase the cost of the product and reduce the competitiveness of that good in the world market. No country will buy goods at a high price, this will act as a tariff o quota or other protectionism norm and reduce the trade volume.