International economics

Let´s Do Some Economics

When analysing the effects on stakeholders of imposing a quota on imported goods it is best seen in a quota diagram. So you are going to construct a diagram - active economics - step by step.

1. Have ready an A4 sheet of paper (you may want graph paper), a pencil, pen and ruler (you can also have an eraser ready)

2. Draw 2 axes for price and quantity, a supply and demand curve (make this big and clear). label these Sdom and Ddom for domestic S and D

3. This time DO NOT draw your dotted lines and equilibrium price (Pe) and quantity(Qe) - it will only get in the way

4. Draw a horizontal line well below the equilibrium to represent supply at the world price - assuming that domestic consumers can buy as much from the world market at the world price as they want to without affecting the world price. Many countries supply goods compared with domestic demand, therefore perfectly elastic.

Now work out and indicate on your diagram:

             (i) The equilibrium quantity (Sworld = Ddom) label it Qe

             (ii) Of that equilibrium quantity how much is produced by domestic producers? Label it Qdom

             (iii) How much is therefore imported from the world market.

5. Impose a quota - to be effective the quota must be a quantity that is less than the amount imported (or it would not be a limit on imports obviously).To do this put a point somewhere between Qdom and Qe on the World supply curve and on the quantity axis, label it Qquota

Now let´s summarise where we are:

             (i) Consumers can buy 0 to Qdom from domestic producers, and

             (ii) Qdom to Qquota from imports.

             (iv) Is this an equilibrium situation? Hopefully you can see that it is not - there are consumers willing and able to buy at higher than world prices                 and there are domestic producers willing and able to produce and sell at higher prices than world prices.

             (v) Therefore there is a new supply curve shifted parallel to the original Sdom and displaced by the amount of the Quota. Draw this is your                         diagram.

             (vi) Now draw in your dotted lines to show the new equilibrium. Qe2

Given the stakeholders (domestic producers, foreign producers, consumers and the government) evaluate from this analysis who wins and who loses from the imposition of a tariff.

What price do consumers have to pay compared with the world price they used to pay? How much can consumers buy compared with pre-quota amount?

How much is the total domestic sales? Qdom + (Qquota to Qe2) so dom sales increases - producers benefit

How much is now imported? Qdom to Qquota

By how much have imports been reduced? So foreign producers lose out.

Is there any government revenue? Is there a cost to government?

Are quotas a better option than tariffs would you say?

Can you reason through the deadweight losses? (the presentation below is a beautiful explanation of the effects of quotas, using a diagram)