Tariffs Quotas Subsidies And their affects on trade

Tariffs, Quotas, Subsidies And their affects on trade

Effects of trade in the domestic market for a good or service Domestic Supply Price Total Supply Pd Pw Domestic Demand Qd 1 Q Quantity Q 1 with trade • The main argument for reducing barriers to trade is • the decreased price level and • resulting increased consumer surplus for households

Imposing a tariff on imports • Domestic Supply Total Supply with Tariff Price • – The tariff has caused the price to increase at every level of foreign output; as the tariff is passed on to consumers, decreasing quantity demanded Total Supply Pd Pt Pw • Domestic Demand Q 1 Q 2 Q Qt Quantity Q 1 with trade The tariff is the vertical distance between the Total Supply and the Total Supply with Tariff indicated by the arrow on the graph The imposition of a tariff causes total supply to decrease Q 2 is the domestic output after the tariff, an increase from Q 1 – An increase in domestic employment, but an increase in domestic surplus less than the total loss of consumer surplus, as well as higher price for households

Imposing a Quota on imports Domestic Supply Total Supply with Tariff Price Total Supply Pd Pt Pw Domestic Demand Q 1 Q 2 Q Qt Quantity Q 1 with trade • The imposition of a Quota has the same effect as a tariff, it causes total supply to decrease – The quota has arbitrarily limited the level of foreign output – Reduction in the number of sellers

Effects of subsidy on a good or service Domestic Supply with Subsidy Price Pd Ps Domestic Demand Q Q 1 with subsidy Quantity • Nations may chose to assist domestic industries by providing subsidies to the firms • The amount of the subsidy is the distance between the Domestic Supply and the Domestic Supply with Subsidy indicated by the arrow on the graph

Effects of an export subsidy in the domestic market for a good or service: the price is lower and the quantity is greater • Domestic Supply with Subsidy Price Total Supply without Subsidy Total Supply with Subsidy Pd • Ps Pw Pw+Ps Domestic Demand Q 1 Q 2 Q 3 Q 4 Quantity Q 5 Q 6 with subsidy Such action by a nation is called a domestic export subsidy, because the industry can now better compete in world trade The quantity supplied by foreign producers (quantity imported) is Q 6 – Q 2