Bloomberg via Getty Britain will have to reach a new trade agreement with the European Union following its decision to sever links with Brussels. The task will be complex and will have to be carried out under the pressure of a two-year deadline. Here are some of the key issues.
Effects of Import Quotas: The import quotas can have various effects such as price effect, protective or production effect, consumption effect, revenue effect, redistributive effect, terms of trade effect and balance of payments effect. Some of them can be studied under the partial equilibrium analysis while some others under general equilibrium system.
However, these effects have been almost exclusively analysed under the partial equilibrium conditions. The effects of import quotas can be discussed with the help of Fig.
In this figure, S0 is the foreign supply curve under free trade and it is perfectly elastic. S1 is the domestic supply curve which slopes positively. D is the demand curve for the given commodity and it slopes negatively. The quantity demanded and supplied of the given commodity is measured along the horizontal scale and price is measured along vertical scale.
In the conditions of free trade, the quantity supplied is OQ and the quantity demanded is OQ1. The excess of demand over supply is met through the import from abroad.
Import quota is the direct physical limitation of the quantity of the given commodity imported from the foreign country. The enforcement of import quota restricts its availability in the home market and creates shortage and consequent rise in its price. Originally, the price of the commodity was Po and the quantity imported amounted to QQ1.
The government of the home country fixes the import quota to the extent of Q2Q3. It signifies a shortage of the commodity compared with the original situation. This rise in the price of the commodity is the price effect of import quota.
Protective or Production Effect: An import quota has a protective effect. As it reduces the imports, the domestic producers are induced to increase the production of import substitutes.
The increased domestic production due to import quota is called as the protective or production effect. Thus there is an increase in domestic production by QQ2. This is the protective or production effect. After the import quota is prescribed, there is a rise in the domestic price of the given commodity.
As a consequence, the consumption of the commodity gets reduced.What are the Economic Effects of Import Quotas? Import quotas, by limiting physical quantities, tend to raise the prices of commodities to which they apply. While this is generally, true also of a tariff, there is one important difference in the impact of quotas.
A quota is a government-imposed trade restriction that limits the number or monetary value of goods that a country can import or export during a particular period.
Countries use quotas in. Recognize the effect of voluntary export restraints on both importing and exporting countries, and describe how the welfare effects of VERs compare with tariff and quota policies.
a. A voluntary export restraint (VER) is a variant on an import quota. These discussions will need to consider the framework for exporting and importing goods (cars and food) and the basis for continued services trade (such as legal advice on big company takeovers.
Table "Welfare Effects of an Import Quota" provides a summary of the direction and magnitude of the welfare effects to producers, consumers, and the governments in the importing and exporting countries.
The aggregate national welfare effects and the world welfare effects are also shown. IMPORT TARIFFS: ENDOGENOUS WORLD PRICE, PARTIAL EQUILIBRIUM A tariff is a tax on imports, so can analyze its effects in the import-export market Right hand panel shows the general case with normal slopes: Home price = World price + t: PX = PX* + t.
When t imposed, PX* falls, PX rises. Effects are in inverse proportion to slopes of curves.