Question

In: Economics

Imports increase the domestic supply and lead to lower prices for consumers. Exports reduce the domestic...

Imports increase the domestic supply and lead to lower prices for consumers. Exports reduce the domestic supply and push price upward. The net effect of international trade is an expansion in total output and higher income levels for both trading partners (law of comparative advantages). "The United States is suffering from an excess of imports. Cheap foreign products are driving American firms out of business and leaving the U.S. economy in shambles." Evaluate this view. Review absolute and comparative advantages. Personal private property protection allows for greater entrepreneurial ventures, and thus an expanding economy and job growth; can import tariffs and quotas reduce the benefits of trade? Review the mechanics of import tariffs and quotas and world price

Solutions

Expert Solution

The absolute and comparative advanyage theories of international trade had advocated trade for economic growth and mutual benefits. But the extent of trade needs to be reviewed on timely interval.

The economy in which imports makes the major portion of domestic supply, thate conomy gets some negative effect of global trade, which may result in reduced price level, increased balance of payments, currency depreciation and lower production level.

Hence, it becomes important for the government to control the trade activities so that import would be reduced and negative trade effects could be eliminated.

The imports could be restricted by imposing tariffs and quotas on importing goods which may depend on price or quantity or on both.

When the import tariffs are imposed on any commodity, the price (world price) of that commodity gets increased which decreases the demand for imports.

The increment of world price due to tariffs would lead to reduced benefits of trade for both the country. The country whose trade is reduced because of tariffs would earn less profits in comparison to previous situation of no trade barriers.

However, the importing country would need to pay higher prices for lesser quantity.

This arrangement of trade barrierrs is advantageous for domestic producers as incrased price of imports would result in shift of demand towards domestic commodity.


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