International trade

1. International trade

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

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

4. Quota Advantages/Disadvantages

5. Quota Examples 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.

6. Quota Examples 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.

7. Quota Examples 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.

8. Quota Examples Csondangvtimposes 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 pricesNew 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.

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

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

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

12. Foreign Exchange Control Effectiveness

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

14. Subsidy Analysis Domestic supply: Ss Domestic demand: Dd. At equilibrium, Price: P1 Quantity of steel: Q1 With the introduction of trade, the price for steel now falls to Pw. 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 productionexpand to 0Q3 units & imports to fall to Q3Q2 units. However, domestic price is still constant.

15. Subsidy Advantages/Disadvantages

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

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

18. Embargoes Advantages/Disadvantages