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International trade. Quota O Sets physical limit on the quantity of a good imported in a given period of time. O Benefit producers in a domestic economy.

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Presentation on theme: "International trade. Quota O Sets physical limit on the quantity of a good imported in a given period of time. O Benefit producers in a domestic economy."— Presentation transcript:

1 International trade

2 Quota O Sets physical limit on the quantity of a good imported in a given period of time. O Benefit producers in a domestic economy. The definition

3 Quota O Be auctioned off to the highest bidder OR O Distributed without payments Workings of quota

4 Advanta ges National Defence Infant Industries d Lower revenue for government Administrative Corruption Smuggling Quota Advantages/Disadvantages

5 Quota Sundial Imports to Csonda Csonda has decided to restrict the sales of sundials by setting quotas, which is targeted to affect the Republic of Northwest Queoldiola, which coincidentally has a comparative advantage in sundial production.comparative advantage Examples

6 Quota The domestic market demand is represented by Dc while the domestic market supply is represented by Sc. In the absence of imports, the domestic market achieves equilibrium at a price of 12 csonds (the domestic currency in Csonda). The quantity exchanged at this equilibrium is 200 sundials. Howver, the imports of Queoldiolan sundials changes this domestic equilibrium. Examples

7 Quota The import demand curve, labelled Dm, is the shortage derived from the Csondan sundial market for prices less than 12 csonds. The export supply curve, labelled Sx, is based on the surplus generated by the Queoldiolan sundial market (not shown) for prices above 8 csonds.shortagesurplus Examples

8 Csondan gvt imposes a quota on the import of Queoldiolan sundials of no more than 50 Queoldiolan sundials.  Sx, in the international market, change.  Curve turns vertical at a value of 50 sundials as Queoldiola cannot export more than 50 sundials to Csonda.  New export supply curve thus has two parts -- positively sloped up to 50 sundials, then vertical for higher prices New eqm: price of 11 csonds and a quantity of 50 sundials. Northwest Queoldiola exports 50 sundials to Csonda at a price of 11 csonds each. Quota Examples

9 Foreign Exchange Control O Restrictions on foreign currencies O Protect own currencies Basic Extreme Banning the use of foreign currencies in domestics stores Banning currency conversion The definition

10 O Limit the demand for foreign exchange up to the available resources O Protect domestic industries O Maintain an overvalued exchange rate O Prevent flight of capital Foreign Exchange Control Objectives

11 O Due to foreign exchange controls, O Consumers have lesser foreign currency to exchange for foreign goods (imports)  Purchasing power for imports ↓  Demand for imports ↓ O Consumers are forced to purchase from the domestic market  Demand for domestic goods ↑  Drives domestic economy Foreign Exchange Control Analysis

12 Foreign Exchange Control Effectiveness EffectiveNot effective  Control flight of capital Direct control on exchange  Prevent flight of capital Very important if a country’s currency is under speculative pressure where tariffs and quotas would not help.  Only minimizes deficit and does not solve the main problem.  Only effective if BOP deficit is due to fear of war, sudden crop failures or similar reasons. However if there are other reasons, it will not be effective.

13 Subsidy O Given by the county's government to the domestic producers so as to protect them from foreign competitions. The definition

14 Subsidy Domestic supply: Ss Domestic demand: Dd. At equilibrium, Price: P1 Quantity of steel: Q1 Assume: Sw is perfectly elastic. Pw: domestic price for steel.  Consumers are now not willing to purchase domestic steel as they are more expensive than the imported steel. To protect the domestic firms, the government would implement a subsidy. Assume: world price not affected Domestic supply curve will shift rightwards from Ss to Ss+Subsidy  domestic production expand to 0Q3 units & imports to fall to Q3Q2 units. However, domestic price is still constant. With the introduction of trade, the price for steel now falls to Pw. Analysis

15 Subsidy Advantages Reduces cost of production Releases resources Increases firms’ competitive edge Disadvantages Increases dependence of firms Advantages/Disadvantages

16 Embargoes O a total ban on imported goods O to punish another country O ban the imports of some harmful goods. The definition

17 O U.S.- and U.K.-sponsored oil embargo against Japan in 1940. O U.S. embargo against Cuba. O U.S. wheat embargo against the Soviet Union during the Carter presidency. O United Nations-sanctioned embargoes against South Africa and Iraq. Embargoes Examples

18 Advantage Less risky and less expensive Disadvantage Counter embargo Embargoes Advantages/Disadvantages

19 Thank You. 11S302 Mimi Hazel Joey Philen e Sen

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