Trade Restrictions Suppose you are examining a small open economy with a large negative trade balance. Describe...

Trade Restrictions

Suppose you are examining a small open economy with a large negative trade balance. Describe briefly the key pros and cons for this country if it decides to introduce a set of restrictions on international trade in order to achieve a situation when exports=imports. What might be the long-term implications of such restrictions? Feel free to make any reasonable assumptions or provide examples, if necessary!

Solutions

Expert Solution

Large negative trade balance means that value of import is higher than the value of export. If Economy decides to put a set of restrictions on international trade so that exports become equal to import then it will bring in some serious implications for the economy.

1. It will force the economy to reduce the import and to utilize the domestic resources to fulfil the needs

2. It will create a situation of higher demand than supply and prices of those "to be imported" goods will increase.

3. If , export is increased then, there will be scarcity of exported goods in the economy and again demand will exceed the supply. Consequently price will increase.

4. Purchasing power will be reduced and savings will come down.

5. Government expenditure will come down and it will adversely affect the GDP and expansion of economy (It is assumed that Government is consuming imported goods)

So, restrictions should be brought in a phased manner so that gradually exports will be increased and imports will be decreased

Rahul Sunny answered 1 year ago

Next > < Previous

Related Solutions

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.

Suppose Country X is a small open economy with a huge trade deficit.

Suppose Country X is a small open economy with a huge trade deficit.Recently, her government suggests a reduction in income tax. Using the Classical Theories, explain what will happen to net capital outflow and real exchange rate in the long run.Explain the impact on the size of her trade deficit.

1) Consider a small open economy that initially starts in balanced trade. Another, "large" economy does...

1) Consider a small open economy that initially starts in balanced trade. Another, "large" economy does tight fiscal policy. As a result, the world real interest rate will _______ and the small open economy will experience a trade ______. a. increase; deficit b. decrease; deficit c. decrease; surplus d. increase; surplus 2) In economics, "domestic" means a. international b. American c. in autarky (not trading) d. actively trading

1. How does a small open economy differ from a large open economy? A. A small...

1. How does a small open economy differ from a large open economy? A. A small open economy has no effect on the world real interest rate. B. A small open economy is only open to trade with similar economies. C.A small open economy is able to influence the world interest rate through its saving and investment decisions. D.In a small open economy, equilibrium occurs when saving equals investment; however, in a large open economy equilibrium occurs when desired saving...

If a small open economy reduces defense spending, what happens to saving, investment, the trade balance,...

If a small open economy reduces defense spending, what happens to saving, investment, the trade balance, the world interest rate, and the exchange rate? Assume that initially saving exceeds investment. I want to see two sets of graphs illustrating the effects, Make sure you explain what is going on!

China is a large open economy with a large trade surplus. The latter has faced since...

China is a large open economy with a large trade surplus. The latter has faced since 2018 a trade war launched by US President Donald Trump in order to rebalance trade with China. This trade war has had some success. China recorded a drop in its trade surplus towards the end of 2019. What effect does the decline in China's trade surplus have on the world interest rate? What is the effect on the Canadian current account (we will assume...

Suppose a large open economy with fixed exchange rate.

Suppose a large open economy with fixed exchange rate.A. What happens to income, interest rate in response to a fiscal expansion?B. What happens to income and interest rate if the central bank expands money supply by buying bonds from the public?

1) Consider a small, open economy starting off with balanced trade. If the economy experiences an...

1) Consider a small, open economy starting off with balanced trade. If the economy experiences an increase in demand for economic investment, the result will be _____________ in the world real interest rate and the introduction of a trade _________. a. no change; deficit b. an increase; surplus c. no change; surplus d. a decrease; deficit 2) Consider a small, open economy that starts off in balanced trade. If its government raises taxes for fiscal policy, we expect to see...

If we are in a small open economy, with balanced trade, and assuming that everyone else...

If we are in a small open economy, with balanced trade, and assuming that everyone else in the world is going after an expansionary fiscal policy, G* increases - What effect would this policy have on world real interest rates? R* Long run model of small open economy to describe effects of expansionary fiscal policy - small open economy interest rates, investment, net foreign investment, real exchange rates, trade balances - Graph the effects of this policy on the small...

2. Suppose that the small country describe in Q1 moves from autarky to open its economy...

2. Suppose that the small country describe in Q1 moves from autarky to open its economy to international free trade and the world price for this particular good is $100. QS = 2P - 20 QD = 600 - 3P a) Solve for the new equilibrium. Specifically, what is the quantity bought by the domestic consumers and the quantity sold by the domestic producers? Is this country importing or exporting this good and how many units? Calculate the new consumer,...

Subjects