Question

Using what you know about supply and demand, what would happen to the equilibrium price and quantity of any domestic goods if you shut the borders to all foreign products?

What would happen to the cost of production for businesses if you required them to only hire domestic workers and only use domestic capital? What would happen to the prices consumers faced?

What would happen to the demand for your country’s exports in the rest of the world if you refused to buy any other country’s exports?

A global recession has hit and you are the economic advisor to a country with a struggling economy and rising unemployment. Your country has a long history of trading with different nations, but due to the recession, labor and business groups are becoming ever more rabid in their pleas for the government to strengthen and enforce trade restrictions. The labor groups argue that too many businesses are trying to cut costs by replacing domestic workers with cheaper foreign labor. At the same time, businesses are claiming that they are losing consumers due to foreign products flooding the markets.  

Based on your answers to a, b, and c, what is the effect of trade restrictions on the economy? What do you tell the interest groups (the business and labor groups that want the trade restrictions)?

Answer 1

1. When all borders are shut, domestic demand for goods and services would increase. Consumers who were earlier buying imported goods will now demand domestic goods.

This wi shift the demand curve to the right, leading to an increase in both price and quantity

2. When only domestic capital and labor are to be used, cost of production would increase, as producers will have to let go off cheap foreign labor.

This will shift supply curve to the left, leading to an increase in price and fall in quantity sold

3. If you refuse to buy other country's exports, demand for your goods would also fall, as all the other countries would engage in tit for tat strategy

This will shift demand curve to the left, leading to a fall in price and quantity sold

4. Effect of trade restrictions: Increase in prices and fall in sales

Business and labor groups would both be worse off

This is because firms would start reducing production, thereby reducing employment of labor and also profits of firms would fall because of lower sales.

Thus, both of them would be worse off.