BoP: Direct Import Controls as Expenditure-Switching Policies Flashcards
What are direct import controls?
Government-imposed restrictions on the quantity or value of specific imported goods
Aimed at improving the trade balance by reducing imports, especially during a trade deficit.
What is the primary aim of direct import controls?
To improve the trade balance by reducing imports
Particularly relevant in the context of a persistent trade deficit.
Do direct import controls address the root causes of trade deficits?
No
They do not tackle issues like low domestic competitiveness.
What is a quota in the context of direct import controls?
A set limit on the quantity or value of a good that can be imported during a specific time period
Once reached, no additional imports can occur until the next period.
What is the effect of a quota once it is reached?
No additional imports can be brought in until the next period
This limits the supply of foreign goods.
What impact do quotas have on domestic goods?
Encourages consumers to turn to domestically produced alternatives
Reduces imports directly and may increase domestic prices.
What is an embargo?
A complete ban on imports from certain countries or of certain goods
Often imposed for political or security reasons.
What is the effect of an embargo on imports?
Eliminates imports entirely from specific sources
This helps reduce the trade deficit.
What impact can embargoes have on supply?
Can severely disrupt the supply of specific goods
May also cause tensions with trading partners.
What is the mechanism by which import controls impact the trade deficit?
Import controls reduce the flow of domestic currency to foreign markets, helping to improve the current account balance in the short term.
What is the outcome of implementing import controls on the trade deficit?
While this may reduce the trade deficit, the underlying issue of low domestic production efficiency or overreliance on imports remains unaddressed.
Give an example of how import quotas can affect trade balance.
If the UK imposes import quotas on Chinese goods, the immediate effect could be a reduction in imports from China, improving the trade balance.
What is a potential drawback of import restrictions regarding retaliation?
Countries affected by import restrictions may retaliate, leading to a trade war.
How can retaliation from trade restrictions harm economies?
Retaliatory tariffs on exports can harm both sides.
What is one consumer impact of reduced imports?
Fewer imported goods lead to less consumer choice.
What effect do import restrictions have on domestic prices?
Reduced competition can lead to higher domestic prices as supply decreases.
Provide an example of how consumer prices can be affected by import restrictions.
If the UK restricts foreign cars, domestic car prices may rise due to less competition.
What economic inefficiencies can protectionist measures cause?
Protectionist measures can divert resources from competitive industries to less efficient domestic sectors.
Define deadweight loss in the context of trade restrictions.
A reduction in economic welfare due to inefficient allocation of resources, represented by the deadweight loss triangle in diagrams.
What happens to the world supply curve without import controls?
The world supply curve (Sₓ) is horizontal at the world price, with domestic supply (Sₖ) and domestic demand (Dₖ) determining market equilibrium, and imports filling the gap.
How does the market equilibrium change with import controls?
A reduction in imports shifts the market equilibrium, raising prices and affecting consumer and producer surplus.
List the results of reduced imports on the market with import controls.
- Higher prices for consumers
- Increased producer surplus due to higher prices
- Decreased consumer surplus due to higher prices and reduced choice
- Deadweight loss, representing overall welfare loss.
What are the short-term effects of direct import controls?
They may reduce the trade deficit by shifting demand towards domestic goods.
What are the long-term effects of direct import controls?
They do not solve underlying issues like competitiveness and may encourage inefficient industries to expand.
What do WTO regulations discourage?
Unilateral import controls and protectionism.
What is a limitation for the UK regarding import controls post-Brexit?
It must still adhere to WTO rules.
What is a criticism of protectionism in relation to global efficiency?
It reduces specialisation and global economic efficiency.
Fill in the blank: A country that specialises in producing high-quality goods may benefit from importing _______.
cheaper raw materials.
What do direct import controls, such as quotas and embargoes, provide in the short term?
Relief for trade imbalances by reducing imports and improving the trade balance.
What are some negative consequences of using direct import controls?
Inefficiencies in resource allocation, higher prices for consumers, and potential retaliation from trade partners.
Do direct import controls address the underlying causes of trade deficits?
No, they do not address the underlying causes.
True or False: Import controls can lead to higher prices for consumers.
True
