pls help to explain two items in the international trade (Economics)

[thesame2]

Would really appreciate if someone could explain the following words which are given in Kaplan notes of Economics

1. Efforts of tariffs and quota

(P218) “Quotas and tariffs in a large country could increase national welfare under a specific set of assumptions, primarily because for a country that imports a large amount of the good, setting a quota or tariff could reduce the world price for that good.”

I don’t understand … how can imposing quotas or tariffs by a large country reduce the world price?

2. The balance of payment (“BOP”) accounts including their components

(P220) Current account comprises three sub-accounts including unilateral transfer. “Unilateral transfers are one-way transfers of assets, such as money received from those working abroad and direct foreign aid. In the case of foreign aid and gifts, the capital account of the donor nation is debited.”

I am a little confused… so does unilateral transfers (in the case of foreign aid and gifts) have an impact on the current account, or capital account, or both?

Thank you in advance!

[thesame2]

anyone please help

Really appreciate it!

[Frederic9873]

Hi,

Might have an answer for Q1. We are dealing with a large country importing a large quantity of goods.

• imposition of a tariff: exporters will have to pay a tariff (sunk cost) to enter the market of the large country. In order to offset this sunk cost that reduces their revenue, exporters will try to find ways to minimize their production price in order to maintain their gross margin margin.

Long story short: tariff will act as an extra fixed cost. To maintain their same production cost, the exporters will have to reduce other fixed/variable costs. The exporter cannot increase price since the large importer country will want less of the more expensive good.

I think the reasoning is the same for the quota. The large country imports lots of good. Since small countries need to export their goods, they will find ways to product more efficiently (increase in competition) in order to offset the negative effect of the quota/tariff.

[thesame2]

@Frederic9873

Hi,

Might have an answer for Q1. We are dealing with a large country importing a large quantity of goods.

• imposition of a tariff: exporters will have to pay a tariff (sunk cost) to enter the market of the large country. In order to offset this sunk cost that reduces their revenue, exporters will try to find ways to minimize their production price in order to maintain their gross margin margin.

Long story short: tariff will act as an extra fixed cost. To maintain their same production cost, the exporters will have to reduce other fixed/variable costs. The exporter cannot increase price since the large importer country will want less of the more expensive good.

I think the reasoning is the same for the quota. The large country imports lots of good. Since small countries need to export their goods, they will find ways to product more efficiently (increase in competition) in order to offset the negative effect of the quota/tariff.

thanks for your help!

[Jaishank]

1. This is how I understood it simply, the fact that if the country was importing a large quantity of goods with tariffs and quotas this large quantity would decrease substantially. A fall in demand leads to a fall in price. 2. So the capital account of the donor country is debited. If US gave aid to India for example, India’s current account would be credited and USA’s capital account would be debited. Hope this helps

[capaldij]

@Jaishank

1. This is how I understood it simply, the fact that if the country was importing a large quantity of goods with tariffs and quotas this large quantity would decrease substantially. A fall in demand leads to a fall in price. 2. So the capital account of the donor country is debited. If US gave aid to India for example, India’s current account would be credited and USA’s capital account would be debited. Hope this helps

Spot on.

[thesame2]

thank you all!