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!

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

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