Question

People sometimes argue that imports should be limited by government policy. Suppose a government quota on the quantity of imports causes net exports to rise. Explain why total expenditures and national output may rise after the quota is imposed. Who is likely to benefit from the quota? Who will be hurt?

Short answer

Answer: A government-imposed import quota can lead to an increase in net exports, total expenditures, and national output. Domestic industries producing the goods subject to the import quota and the overall economy may benefit from this policy. However, consumers and foreign exporters may be negatively impacted by reduced choices, higher prices, and loss of market access.

Step-by-step solution

Understanding government-imposed import quotas

A government-imposed import quota is a restriction on the quantity of a particular good that can be imported into a country. This is an example of trade protectionism, aiming to protect domestic industries from foreign competition, and thus promoting self-sufficiency and economic growth.

Effect on net exports, total expenditures, and national output

When a government imposes an import quota, the quantity of imported goods decreases. As a result, net exports (exports - imports) will rise. This increase in net exports, in turn, leads to an increase in total expenditures, which comprises consumption, investment, government spending, and net exports. As total expenditures increase, national output (GDP) increases as well, since total expenditures are the primary driver of GDP. Thus, when a government imposes an import quota, it can stimulate an increase in both total expenditures and national output.

Beneficiaries of import quotas

Domestic industries that produce the goods subject to the import quota are likely to benefit from this protectionist policy. With the reduced competition from foreign imports, these industries may experience a surge in demand for their products, which can lead to growth, higher profit margins, and a boost in market share. Additionally, the overall economy might experience short-term growth resulting from increased domestic production and spending.

Those detrimentally impacted by import quotas

On the other hand, consumers may be negatively impacted by government-imposed import quotas. With fewer imported goods available, there may be fewer choices, higher prices, and potentially reduced quality of domestic alternatives, due to a lack of competition between domestic and foreign producers. Foreign exporters that lose access to the market where the import quota is imposed are also negatively affected, as their sales, revenues, and market shares may decrease. In summary, a government-imposed import quota can lead to an increase in net exports, total expenditures, and national output. However, the benefits and drawbacks of such policies need to be thoroughly considered since they can create significant winners and losers in the economy.