Suppose a small open economy enacts imports restrictions, which is represented as an exogenous increase in...

Suppose a small open economy enacts imports restrictions, which is represented as an exogenous increase in net exports in our model. Using the small open economy model, describe and explain the impact of the import restrictions on the small open economy.

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Answer - As a result of the import restrictions , the imports become expensive and the volume is reduced. Thus people employed in this import sector have to undergo shifts in job . This is called sectoral shift and this causes the frictional unemployment in the economy. This also leads to greater supply of labor force for domestic industries. Domestic industries on the other hand , are motivated as a result of increased demand for domestic products as imports are reduced. Hence the domestic production rises and price also rises as domestic demand increases. Greater labor supply leads to fall in wages and greater supply of products leads to rise in exports.

Rahul Sunny answered 2 years ago

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