Global Economic Issues (Unit 3 Topic 2)

How to use the interactive model:

• use the sliders (or drag curves) to shift the 'S global' curve and the 'S domestic + Quota' curve 

• or press the 'try a scenario' button

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Why is this stuff important to know?

Import quotas are a method used by governments to restrict the quantity of international goods entering domestic markets.

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In this interactive model, if an economy does not allow any entry of foreign goods, trade would occur at equilibrium point A ($120 and 3m units). However, if international trade were to occur without any import limits, trade equilibrium would shift to point X ($100 and 5m units). 

Import quotas give governments a method to have a controlled import of goods whilst still supporting domestic industries.

 

The Australian car market benefitted from import quotas back in the day - for example, one car could be imported for every four made in Australia. The controlled method gives some additional choice for consumers at lower prices, whilst also providing a degree of protection for domestic producers. However, quotas are considered a market distortion and are not economically efficient.