DIVISION OF LABOR: A basic economic notion that labor resources are used more efficiently if work tasks are divided among different workers. This allows workers to specialize in production as each becomes highly skilled at specific tasks. Efficiency achieved through specialization and the division of labor was popularized by Adam Smith in his classic work, The Wealth of Nations. This division-of-labor notion is one of those concepts that is so fundamental to the economy that its importance is occasionally overlooked in the real world. It is, for example, essential to foreign trade. Without the division of labor the comfortable standard of living currently provided by our exceeding complex economic system would not be possible.
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Quantity restrictions imposed by the government of one nation on imports from other nations. The primary goal of import quotas is to reduce imports and increase domestic production. Because the quantity of imports is restricted, the price of imports increases, which thus encourages domestic consumers to buy more domestic production. Import quotas are one of three common foreign trade policies designed to discourage imports and/or encourage exports. The other two are tariffs and export subsidies. Import quotas are foreign trade policies undertaken by domestic governments that are intended to "protect" domestic production by restricting foreign competition. In general, a quota is simply a quantity restriction placed on a good, service, or activity. For example, employers often face hiring quotas for different demographic groups and sales representatives often have quotas for sales activities.
Import quotas are then merely legal restrictions on the quantities of imports from the foreign sector that are imposed by the domestic government.
The goal of import quotas is to increase the limit the availability of imports in the domestic economy and thus encourage domestic consumers to purchase domestic production.
The Why of Import QuotasThe imposition of import quotas on foreign imports, as well as other foreign trade policies, are commonly justified for at least five of reasons.
While import quotas and other foreign trade policies can be beneficial to the aggregate domestic economy they tend to be most beneficial, and thus most commonly promoted by, domestic firms facing competition from foreign imports. Domestic firms benefit with higher sales, greater profits, and more income to resource owners. However, by increasing domestic prices and restricting accessing to imports, foreign trade policies also tend to be harmful to domestic consumers.
- Domestic Employment: Because foreign imports are produced in other countries by foreign workers, decreasing imports and increasing domestic production also increases domestic employment.
- Low Foreign Wages: Restricting imports produced by foreign workers who receive lower wages "levels the competitive playing field" compared to domestic goods produced by higher paid domestic workers.
- Infant Industry: If foreign imports compete with a relatively young domestic industry that is not mature enough nor large enough to benefit from economies of scale, then import quotas protect the "infant industry" while it matures and develops.
- Unfair Trade: The foreign imports might be sold at lower prices in the domestic economy because foreign producers engage in unfair trade practices, such as "dumping" imports at prices below production cost. Import quotas seek to prevent foreign producers such activity.
- National Security: Import quotas can also discourage imports and encourage domestic production of goods that are deemed critical to the security of the national economy.
Sundial Imports to Csonda: An ExampleConsider if you will, how one hypothetical country, the United Provinces of Csonda might be inclined to make use of quotas on foreign imports. Csonda, like any real world sovereign nation, is inclined to implement import quotas and other foreign trade policies that are designed to increase net exports. In particular, Csonda has decided to restrict the sales of one particular good -- sundials. The principal target of Csonda import quotas is the Republic of Northwest Queoldiola, which coincidentally has a comparative advantage in sundial production.The left panel in this exhibit contains the domestic Csondan market for sundials. The domestic market demand is represented by the negatively-sloped demand curve, labeled Dc. The domestic market supply is represented by the positively-sloped supply curve, labeled Sc. In the absence of imports, the domestic Csondan market achieves equilibrium at a price of 12 csonds (which is the domestic currency in Csonda). The quantity exchanged at this equilibrium is 200 sundials.
Imports of Queoldiolan sundials changes this domestic equilibrium. The right panel presents the international market for sundials. The import demand curve, labeled Dm, is the shortage derived from the Csondan sundial market for prices less than 12 csonds. The export supply curve, labeled Sx, is based on the surplus generated by the Queoldiolan sundial market (not shown) for prices above 8 csonds.
The international market achieves a sundial price of 10 csonds such that Csonda imports 100 sundials from Northwest Queoldiola. The goal of the Csondan Sundial Manufacturers Association is to reduce the quantity of imports and to increase the price. Click the [Imports] button to highlight this situation.
Now a QuotaSuppose that the Csondan government imposes a quota on the importation of Queoldiolan sundials. In particular, let's say that it restricts imports to no more than 50 Queoldiolan sundials.
This import quota causes the export supply curve, Sx, in the international market to change. Up to 50 sundials the current export supply curve is relevant. However, with the import restriction, the curve turns vertical at a value of 50 sundials. Queoldiola CANNOT export more than 50 sundials to Csonda. The new export supply curve thus has two parts -- positively sloped up to 50 sundials (a price of 9 csonds), then vertical for higher prices. A click of the [Quota] button reveals this new export supply curve and the resulting equilibrium in the international market.
This equilibrium is achieved at a price of 11 csonds and a quantity of 50 sundials. That is, Northwest Queoldiola exports 50 sundials to Csonda at a price of 11 csonds each.
Some of he consequences of this quota are much as expected, others not.
An import quota eliminates some of the gains from trade generated by the exchange between Csonda and Northwest Queoldiola which prompted the trade in the first place. However, an import quota does make the domestic Csondan producers better off, even though this is at the expense of the domestic Csondan consumers.
- First, with fewer imports entering Csonda from Northwest Queoldiola, domestic producers are able to increase their quantity produced. The domestic quantity of Csondan sundials produced increases from 150 to 175. However, the combination of domestic production and imports (175 plus 50) generates a smaller consumption quantity after the quota is imposed than before (225 versus 250).
- Second, with these changes in quantity supplied and quantity demanded, the price increases from 10 csonds to 11 csonds, in accordance with the law of supply on the producing side and the law of demand on the consuming side.
- Third, domestic Csondan sundial manufacturers produce a larger quantity (175 versus 150) at a higher price (11 csonds versus 10 csonds). As a result, more revenue flows to the domestic Csonda producers. They are definitely better off, which is just the result they were seeking.
- Fourth, domestic Csondan sundial buyers consume a smaller quantity (225 versus 250), also at a higher price (11 csonds versus 10 csonds). They are paying more for sundials and receiving fewer sundials. As a result, they are worse off.
- Fifth, unlike a tariff, the Csondan government does not receive any tax revenue.
Two Other Foreign Trade PoliciesImport quotas are one of three common foreign trade policies that are designed to increase net exports by decreasing imports or increasing exports. The other two are tariffs and export subsidies.
- Tariffs: Tariffs are simply taxes imposed by the government of one nation on imports from other nations. They work like any other taxes. A tariff is added to the price of the imported good. The resulting price of the import is thus higher, which tends to decrease the quantity purchased. And if fewer imports are purchased, then more domestic production is sold. Of course, while domestic producers benefit from tariffs, domestic consumers tend to suffer. They pay higher prices for both imports and domestic production.
- Export Subsidies: An export subsidy is then a subsidy paid to domestic producers to encourage exports of production to the foreign sector. This export subsidization effectively increases the overall revenue received by the domestic firms when exporting production, which is bound to encourage exports. Export subsidies are usually justified as a means of helping domestic producers compete with lower cost imports. While imports might have lower costs due to comparative advantage, they also might be subsidized by foreign governments. Unlike tariffs and import quotas, domestic consumers, like domestic producers, tend to benefit from lower prices of both imports and domestic production. However, domestic taxpayers end up paying for this subsidization.
IMPORT QUOTAS, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2024. [Accessed: March 3, 2024].
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