Hi! There is a question on Schweser notes asking the least likely result of import quotas and voluntary export restraint. The choices are:
a) increased revenue for the government
b) a decrease in the quantity of imports of the product
c) a shift in production toward higher-cost suppliers.
The correct answer is A.
Could someone explain the answer to me? Why is answer c a likely result of import quotas and VER and What does higher-cost supplier mean anyways?
And why does VER decreases the quantity of import of the product given VER’s goal is to restrict the amount of a good exported? (I just don’t understand how restricting the amount of a good A to be exported decreases the quantity of imports of product A? Is it because if there is not many product A exported, there should be enough A in the domestic market so that no import is needed?)
“Higher-cost supplier” means . . . suppliers with higher costs (e.g., higher wage rates).
VER doesn’t decrease the import quantity; import quotas do. And import quotas shift production toward higher-cost (domestic) suppliers. (We don’t know for certain that domestic suppliers have higher costs, but there’s some reason that we’re importing; it may be that imported goods are less expensive, or it may be that domestic goods are inferior. However, higher-cost domestic suppliers is a likely possibility.)