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Tariffs, Quotas, Subsidies And their affects on trade.

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Presentation on theme: "Tariffs, Quotas, Subsidies And their affects on trade."— Presentation transcript:

1 Tariffs, Quotas, Subsidies And their affects on trade

2 Effects of trade in the domestic market for a good or service The main argument for reducing barriers to trade is the decreased price level and resulting increased consumer surplus for households Quantity Price Domestic Supply Total Supply Domestic Demand Pd Q1 with tradeQQd1 Pw

3 Imposing a tariff on imports The tariff is the vertical distance between the Total Supply and the Total Supply with Tariff indicated by the arrow on the graph The imposition of a tariff causes total supply to decrease –The tariff has caused the price to increase at every level of foreign output; as the tariff is passed on to consumers, decreasing quantity demanded Q2 is the domestic output after the tariff, an increase from Q1 –An increase in domestic employment, but an increase in domestic surplus less than the total loss of consumer surplus, as well as higher price for households Quantity Price Domestic Supply Total Supply Domestic Demand Pd Q1 with tradeQQ1 Pw Total Supply with Tariff Pt QtQ2

4 Imposing a Quota on imports The imposition of a Quota has the same effect as a tariff, it causes total supply to decrease –The quota has arbitrarily limited the level of foreign output –Reduction in the number of sellers Quantity Price Domestic Supply Total Supply Domestic Demand Pd Q1 with tradeQQ1 Pw Total Supply with Tariff Pt QtQ2

5 Effects of subsidy on a good or service Nations may chose to assist domestic industries by providing subsidies to the firms The amount of the subsidy is the distance between the Domestic Supply and the Domestic Supply with Subsidy indicated by the arrow on the graph Quantity Price Domestic Supply Domestic Supply with Subsidy Domestic Demand Pd Q1 with subsidyQ Ps

6 Effects of an export subsidy in the domestic market for a good or service: the price is lower and the quantity is greater Such action by a nation is called a domestic export subsidy, because the industry can now better compete in world trade The quantity supplied by foreign producers (quantity imported) is Q6 – Q2 Quantity Price Domestic Supply Total Supply without Subsidy Domestic Demand Pd Q6 with subsidy Q3Q1 Pw Ps Domestic Supply with Subsidy Total Supply with Subsidy Q5Q2Q4 Pw+Ps


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