Question

2) The US is a big country in the market of lemons and a "net importer." Argentina is a "net exporter" and a big country in that market. Analyze the welfare effect of an export quota by the Argentinian government on the economies of the US and Argentina. What happens with the "term of trade"?

Answer 1

Ans ) The term export quota is the restriction imposed on the export by a country through voluntary or with a certain agreement with other countries.For the above question we can say that the Argentina imposed export quota on lemon that is restricted the export of lemons.This is done in order to reduce the shortage of lemon in the domestic market and to protect the domestic industry which uses lemon as a raw material in Argentina.The other reasons can be the welfare of household as if there is a shortage of lemon in the domestic market due to export the price of lemon increases due to law of demand

But on the other hand firms which export lemon will face a reduction in demand so the production decreases and there will be unemployment it has a negative impact on trade balace as export falls. Welfare is related to the net gain or loss to the quota on consumer and producers hence for the importing country it has a positive impact on the trade balance which is Export - import as import decreases but consumer in the importing country such as in this case the US consumer will face the shortage in the supply of lemons as well the producers of products made up of lemons will face the same .Also this will result in the increase in the demand of lemon that results in the rise in price of lemons in the US market but on the other hand the domestic agricultural sector in the US of lemons will have a rise in profits.