International trade

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 effectiveControl 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

SubsidyAdvantages

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