Question

Ghana’s president’s Import Substitution Industralization  strategy is to ask Switzerland to adopt a voluntary export restraint (VER). He believes that this is likely to increase Ghanaian welfare. Using two diagrams (one for each country) explain the Ghanaian welfare consequences of this policy.

Answer 1

Ghana's president;s Import Substitution Industrialization strategy is to ask Switzerland to adopt a Voluntary Export Restraint ( VER). Import Substitution Industrialization is a policy of developing countries that wishes to decrease their dependence on developed countries especially manufacturing goods. The main objective of Import Substitution industrialization is to protect the newly created domestic industries so as to encourage the production of goods and services to compete with imported goods. Voluntary export restraints is a case where an importing country induces other nation to reduce its export of commodity to other nation. Import Substitution Industrialisation encourage production of more good and services that compete with imported goods. It reduced the import of Ghana from switzerland . Initially ,supply curve and demand curve of domestic nation determine the production of commodity X. During free trade, Ghana produces 10 units of commodity X and imports 60 units of commodity X from Switzerland, and totally Ghana consumes 70 units of commodity X . When Ghana government introduced ISI program , it reduces the import of commodity X from 60 to 30 units ,but it increases the production of commodity X to 20 units , totally Ghana consumes 50 units if commodity X, ISI program reduces consumer surplus and increases producer surplus and revenue surplus of government. AGHB is the loss in consumer surplu and ACJG is increase in producer surplus. Revenue of government increases by increasing tariff rate on importing of 30 units of commodity X Initially ,supply curve and demand curve of domestic nation determine the production of commodity X. During free trade, Switzerland produces 60 units of commodity X and 10 imports units of commodity X , and totally Switzerland consumes 70 units of commodity X . When Ghana government introduced ISI program and Voluntary Exchange Restraints, Switzerland reduces export and production of commodity X from 60 to 30 units to Ghana . VER increases consumer surplus and decreases producer surplus in switzerland