ECON 2000 Lecture Notes - Lecture 78: Trade Restriction, Import Quota, Canadian Dollar
14 May 2018
School
Department
Course
Professor
ECON 2000
Lecture 78
Trade policy
- Govt reduces demand for imported goods by imposing an import
quota or tariff
- Reduction in imports means increase in net exports
- NX schedule shifts to the right
- Shift in NX schedule increases PE and moves IS* curve to the right
- Because LM* curve is vertical, trade restriction raises the exchange
rate but doesn’t affect income
- Economic forces behind this transition similar to case of expansionary
fiscal policy
- Because NX are a component of GDP, rightward shift in NX
schedule, other things equal, puts upward pressure on income Y
- Increase in Y increases money demand and puts upward pressure on
int rate r
- Foreign capital quickly responds by flowing into the domestic
economy, pushing int rate back to world int rate and causing
domestic currency to appreciate in value
- Appreciation of currency makes domestic goods more expensive
relative to foreign goods which decreases NX and returns income Y
to its initial level
- Often a stated goal of policies to restrict trade is to alter trade balance
NX
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Document Summary
Govt reduces demand for imported goods by imposing an import quota or tariff. Reduction in imports means increase in net exports. Shift in nx schedule increases pe and moves is* curve to the right. Because lm* curve is vertical, trade restriction raises the exchange rate but doesn"t affect income. Economic forces behind this transition similar to case of expansionary fiscal policy. Because nx are a component of gdp, rightward shift in nx schedule, other things equal, puts upward pressure on income y. Increase in y increases money demand and puts upward pressure on int rate r. Foreign capital quickly responds by flowing into the domestic economy, pushing int rate back to world int rate and causing domestic currency to appreciate in value. Appreciation of currency makes domestic goods more expensive relative to foreign goods which decreases nx and returns income y to its initial level. Often a stated goal of policies to restrict trade is to alter trade balance.
