international trade. quota o sets physical limit on the quantity of a good imported in a given...
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Quota
O Sets physical limit on the quantity of a good imported in a given period of time.
O Benefit producers in a domestic economy.
T h e d e fi n i t i o n
Quota
O Be auctioned off to the highest bidder
OR
O Distributed without payments
W o r k i n g s o f q u o t a
Advantages
National Defence
Infant Industries
d
Lower revenue for government
Administrative Corruption
Smuggling
QuotaA d v a n t a g e s /D i s a d v a n t a g e s
Quota
Sundial Imports to Csonda
Csonda has decided to restrict the sales of sundials by setting quotas, which is targeted to affect the Republic of Northwest Queoldiola, which coincidentally has a comparative advantage in sundial production.
E x a m p l e s
QuotaThe domestic market demand is represented by Dc while the domestic market supply is represented by Sc. In the absence of imports, the domestic market achieves equilibrium at a price of 12 csonds (the domestic currency in Csonda). The quantity exchanged at this equilibrium is 200 sundials. Howver, the imports of Queoldiolan sundials changes this domestic equilibrium.
E x a m p l e s
QuotaThe import demand curve, labelled Dm, is the shortage derived from the Csondan sundial market for prices less than 12 csonds. The export supply curve, labelled Sx, is based on the surplus generated by the Queoldiolan sundial market (not shown) for prices above 8 csonds.
E x a m p l e s
Csondan gvt imposes a quota on the import of Queoldiolan sundials of no more than 50 Queoldiolan sundials.
Sx, in the international market, change.Curve turns vertical at a value of 50 sundials as Queoldiola cannot export more than 50 sundials to Csonda. New export supply curve thus has two parts -- positively sloped up to 50 sundials, then vertical for higher prices
New eqm: price of 11 csonds and a quantity of 50 sundials. Northwest Queoldiola exports 50 sundials to Csonda at a price of 11 csonds each.
QuotaE x a m p l e s
Foreign Exchange Control
ORestrictions on foreign currencies OProtect own currencies
Basic Extreme
Banning the use of foreign currencies in domestics stores
Banning currency conversion
T h e d e fi n i t i o n
O Limit the demand for foreign exchange up to the available resources
O Protect domestic industries
O Maintain an overvalued exchange rate
O Prevent flight of capital
Foreign Exchange ControlO b j e c t i v e s
O Due to foreign exchange controls,
O Consumers have lesser foreign currency to exchange for foreign goods (imports) Purchasing power for imports ↓ Demand for imports ↓
O Consumers are forced to purchase from the domestic market Demand for domestic goods ↑ Drives domestic economy
Foreign Exchange ControlA n a l y s i s
Foreign Exchange ControlE ff e c t i v e n e s s
Effective Not effective
Control flight of capital Direct control on exchange Prevent flight of capital Very important if a country’s currency is under speculative pressure where tariffs and quotas would not help.
Only minimizes deficit and does not solve the main problem. Only effective if BOP deficit is due to fear of war, sudden crop failures or similar reasons. However if there are other reasons, it will not be effective.
Subsidy
O Given by the county's government to the domestic producers so as to protect them from foreign competitions.
T h e d e fi n i t i o n
SubsidyDomestic supply: Ss Domestic demand: Dd. At equilibrium, Price: P1 Quantity of steel: Q1
Assume: Sw is perfectly elastic. Pw: domestic price for steel. Consumers are now not willing to purchase domestic steel as they are more expensive than the imported steel. To protect the domestic firms, the government would implement a subsidy. Assume: world price not affected Domestic supply curve will shift rightwards from Ss to Ss+Subsidy domestic production expand to 0Q3 units & imports to fall to Q3Q2 units. However, domestic price is still constant.
With the introduction of trade, the price for steel now falls to Pw.
A n a l y s i s
Subsidy
Advantages
Reduces cost of
production
Releases resources
Increases firms’
competitive edge
Disadvantages
Increases dependence of firms
A d v a n t a g e s /D i s a d v a n t a g e s
Embargoes
O a total ban on imported goods O to punish another country O ban the imports of some harmful
goods.
T h e d e fi n i t i o n
O U.S.- and U.K.-sponsored oil embargo against Japan in 1940.
O U.S. embargo against Cuba.
O U.S. wheat embargo against the Soviet Union during the Carter presidency.
O United Nations-sanctioned embargoes against South Africa and Iraq.
EmbargoesE x a m p l e s
Advantage
Less risky and less
expensive
Disadvantage
Counter embargo
EmbargoesA d v a n t a g e s /D i s a d v a n t a g e s