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Quotas - Limit On The Physical Quantity of A Good That Can Be Imported

International trade provides benefits like lower prices, increased variety and choice for consumers, and economic growth. However, critics argue that trade negotiations favor rich countries, gains primarily benefit the rich, and poor countries cannot adequately participate. Supporters counter that free trade promotes peace, economic growth, higher incomes, and efficiency through specialization and comparative advantage. There are arguments both for and against protectionism depending on priorities like jobs, industries, trade balances, and standards. The WTO aims to facilitate trade through non-discriminatory rules while also encouraging development.

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76 views

Quotas - Limit On The Physical Quantity of A Good That Can Be Imported

International trade provides benefits like lower prices, increased variety and choice for consumers, and economic growth. However, critics argue that trade negotiations favor rich countries, gains primarily benefit the rich, and poor countries cannot adequately participate. Supporters counter that free trade promotes peace, economic growth, higher incomes, and efficiency through specialization and comparative advantage. There are arguments both for and against protectionism depending on priorities like jobs, industries, trade balances, and standards. The WTO aims to facilitate trade through non-discriminatory rules while also encouraging development.

Uploaded by

wynnewong
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd
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Benefits:

-Lower price -specialize = efficiency


-Taking advantage of different factor
endowments -differences in resources base
-Economies of scale
-Increased variety/choice
-Acquisition of needed resources
-Competition can improve efficiency
-Political benefits -encourage compromise and
resolution over conflict and antagonism for
predictable supply and steady & reliable output
-Efficiency and exports = growth and
development -develop comparative advantages,
more efficient allocation of resources, boost GDP
Critics' view:
-negotiations favor rich
-gains benefit rich
-poor cannot afford representatives
-rich are getting richer
-no address on tariff escalation
-agricultural subsidies have not been
reduced
-innovation cannot spread to developing
rich use other barriers instead of tariffs
-ignore rights and safety issues
Supporters' view:
-promotes peace, reduce conflict
-place to handle disputes constructively negotiation, compromise
-based on rules not power, protect small
countries
-free trade cuts cost of living
-choice and variety
-boost incomes
-increases economic growth &
employment
-efficiency & simplicity
-shields countries from narrow interests
-good incentives for better government
Comparative advantage and opportunity
cost
-comparative advantage - when a country
produces a good at a lower domestic
opportunity cost than another country
-countries should specialize in the
production of whatever has the lowest
opportunity cost and trade to enjoy higher
standard in living
Sources of comparative
advantage
-relative abundance of resources
-value of the good produced from
the resource
limitations of comparative advantage
-perils of extreme specialization
-unrealistic assumptions
-transport costs, identical, perfect
information, constant costs, only 2 country,
full employment, free trade

Arguments against
protectionism
-Misallocation of resources
-Escalation to trade war
-Protectionism as a corruption
magnet
-Domestic complacency
causes higher prices and
costs
-Higher import costs
-Reduced export
competitiveness

Arguments for protectionism


-To protect domestic employment
-To protect sunrise or infant industries
-To counteract relative domestic tax differences
-To prevent the dumping of foreign goods onto
the domestic market
-To diversify the production base of a
developing country
-To enforce product standards
-To raise government revenue
-To protect against unfairly low labor costs
-To protect strategic industries
-To overcome a balance of payments deficit
-To improve the terms of trade

Aims of the WTO


-Trade without discrimination
-Freer trade through negotiation
-Predictability through binding
and transparency
-Promoting fair competition
-Encouraging development

Tariffs - an import tax placed on a good produced abroad


-added cost, decreases supply
Domestic producers
higher price, sell more 0-Q1 -> 0-Q2, revenue PwQ1 to
Pw+TQ2
Foreign producers
export less, Q1-Q4 -> Q1-Q2
Government revenue: E
Consumers
Higher prices, smaller quantity 0-Q4 -> 0-Q3
Welfare loss: d+f
-restrict demand from 0-Q4 -> 0-Q3

Functions:
-provide a forum for trade negotiation
-execute WTO agreements
-evaluate and rule on trade
complaints by member countries
-provide technical assistance to
developing countries on trade issues
-track changes in member trade
policies
domestic opportunity cost X
= output Y/output X = Y
domestic opportunity cost X
= input Y/input X = Y
cross market comparison
compare - smaller #

Quotas - limit on the physical quantity of a good that


can be imported
-Domestic production increases from 0Q1 to 0Q1+Q3Q4, sell
more at higher prices (Pw+Quota)
-Domestic consumption fall from 0Q2 to 0Q4
-Imports fall from Q1Q2 to Q1Q3 paying Pw,to Pw+Quota
-government gets no advantage
-market inefficiency - decrease in consumption and production
by less efficient producers
-J and K represents the dead weight loss of welfare to the
society, as J represents production by inefficient producers and
K represents the loss of consumer surplus.

protectionism - placement of legal restrictions on


international trade
-protect from unpredictability and foreign
competition
infant industries - newly developed not had
opportunities to develop economies of scale
dumping - selling of goods to another country
below original

Voluntary export restraints - selfimposed quota


Administrative barriers
Bureaucratic barriers
Product standards
Environmental standards
Qualifications

Domestic Producer before:


PworldxQdomestic
Domestic Producer after:
Pt/q/sxQndomesttic
Foreign producer before:
PworldxQimports
Foreign producer after:
PworldxQnimports
Consumer surplus before/after:
1/2(highestP-Pworld)xQworld
Government revenue/expenditure
amount x #imports
Social welfare:
area of triangle

Subsidies - government payment to a firm that can be


used to promote exports and/or reduce quantity of
imports
-Consumption remains at Q3.
-Taxpayers lose as the tax revenue collected is being used
for subsidies
-Domestic producers gain as the production increases from
0Q1 to 0Q3.

-International Trade - buying and selling of goods and services across country borders
-growth occurs because it benefits both parties to the transaction
-all countries have valuable resources and using their different resources to the fullest through
specializing and trading should yield extra wealth for all.

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