trade protectionism (look at quotas)

Question 1

Quota

Answer 1

A quota is a limit to the quantity coming into a country.

Question 2

Imposing a quota

Answer 2

With no trade, equilibrium market price in the country will exist at the price which equates domestic demand and domestic supply, at P, and with output at Q. In an attempt to protect domestic producers, a quota of Q2 to Q3 may be imposed on imports. This enables the domestic share of output to rise to 0 to Q2, plus Q3 to Q4. The quota creates a relative shortage and drives the price up to P2, with total output falling to Q4. The amount imported falls to the quota level. It is this price rise that provides an incentive for less efficient domestic firms to increase their output.

Question 3

Tariff

Answer 3

Tariffs, or customs duties, are taxes on imported products, usually in an ad valorem form, levied as a percentage increase on the price of the imported product. Tariffs are one of the oldest and most pervasive forms of protection and barrier to trade.

Question 4

Tariff consequences

Answer 4

Higher prices - loss of consumer surplus, gain of producer surplus
Welfare loss - the reduction in consumer surplus is greater than the increase in producer surplus
Distortion - There is a potential distortion of the principle of comparative advantage - alters the cost advantage that countries may have built up through specialisation.
Retaliation - There is the likelihood of retaliation from exporting countries, which could trigger a costly trade war.

Question 5

Differences between quota and tariff

Answer 5

One of the key differences between a tariff and a quota is that the welfare loss associated with a quota may be greater because there is no tax revenue earned by a government. Because of this, quotas are less frequently used than tariffs.

Question 6

other

Answer 6

ones