4.2 (Global economy) Trade protection: Import quota: Domestic nation: Importing nation скачать в хорошем качестве

4.2 (Global economy) Trade protection: Import quota: Domestic nation: Importing nation

Video tutorial for IB Economics students illustrating how to draw, analyze, and evaluate how the importing national industry (U.S.) for a primary commodity (sugar) is impacted by an import quota. Note: IB Econ Paper analysis of the economic model at time 10:11 -------------- Analysis Graph A: Domestic sugar industry for the U.S. (importing nation) x-axis measures quantity supplied and demanded of sugar y-axis measures the price of sugar Sd (law of supply) = the sum of all firms in the nation that produce sugar = domestic supply of sugar Sd: PES is less than 1 (inelastic) due to length of time to plant and harvest sugar Dd (law of demand) = the sum of all firms in the nation that demand sugar as a key input in their production = domestic demand of sugar Dd: PED is less than 1 (inelastic) due to no close substitute for firms that demand sugar as a key input in their production Sd=Dd (point A), provides an equilibrium domestic price and an equilibrium domestic quantity (Qs=Qd) The U.S. opens to world trade (it engages in free trade) and accepts the world price (Pw) Pw (perfectly elastic world supply curve) is less than the equilibrium domestic price, thus U.S. domestic sugar producing firms will reduce the Qs to Q1 (point C) (some productively inefficient sugar producing firms will shut down and exit the domestic and global industry since they do not have the comparative advantage due to higher production costs, this will also lead to increased unemployment in the domestic sugar industry) Pw is less than the equilibrium domestic price, thus U.S. firms that demand wheat as a key input in their production process will increase their Qd to Q4 (point B) (these firms thus can increase the production of output which will generate more employment in their industry) At Q4, MB = MC thus global allocative efficiency is achieved Qd is greater than Qs, thus the U.S. will import sugar by the quantity of Q4 - Q1 The domestic central government decides to impose an import quota as a means to protect the domestic sugar industry from foreign competition An import quote is applied restricting imports by the amount of Q2 - Q1; in theory I can also state that the import quantity is equal to Q3 - Q2 Domestic Qs at Pw is from 0 to Q1, import quota is from Q1 to Q2, thus there is a shortage as Qd at Q4 is greater than Qs at Q2 The shortage places upward pressure on price, thus price rises from Pw to Pq As price rises, an additional supply curve is created at Sd2 = Sd1 + quota Along Sd2, Qs increases from Q2 to Q3 where the shortage is eliminated At Pq, Qd decreases from Q4 to Q3 Note: IB Econ Paper evaluation for the economic model at time 14:20 ---------------- Evaluation The following provides an evaluation of the import quota's impact on stakeholders 1. Domestic consumers are negatively impacted as price rises from Pw to Pq Consumer surplus before the tariff is areas a + b + c + d1 + d2+ e1 + e2 + f Consumer surplus after the tariff is areas a + b Reduced consumer surplus for firms that consume sugar as a key input has the following impacts: decreased supply as a result of an increase in their costs of production (higher sugar prices), which will lead to reduced total revenue, profit, & increased unemployment of resources (labor) 2. Domestic producers are better off as their producer surplus & total revenue is increased as a result of the increase in price from Pw to Pq Producer surplus before the tariff is area g Producer surplus after the tariff is areas (g + c + d1) = (g + c + e1) (g + c + d1) is greater than g, or (g + c + e1) is greater than g TR1 (before tariff) = Pw x Q1 TR2 = Pq x Q2 TR2 is greater than TR1 4. Workers in the national sugar industry are better off since there is increased Qs by domestic sugar producers from Q1 to Q2 leading to increased employment by sugar firms of factors of production such as labor 5. The government did not gain tax revenue or spend in terms of a production subsidy, thus is not negatively impacted But, the domestic government will have created political tension with the government's of exporting nations that have been negatively impacted by the import quota (reduced exports by the firms in those exporting foreign nations) 6. Foreign firms are negatively impacted by the import quota Reduced imports in the domestic nation results in reduced exports for foreign nations with productively efficient sugar producers, this will also lead to rising unemployment in the sugar industry of those foreign nations 7. Global allocative efficiency is negatively impacted as at Q3, MB is greater than MC, which generates an underallocation of resources to the production & consumption of sugar in the global & domestic economy (welfare loss of area f) Welfare loss of area d2 = increased output by productively inefficient domestic firms Welfare loss of area e1 + e2 = quota revenue that is transferred abroad to exporting nations