Impact of Restrictive Trade Policies (With Diagram)

Impact of trade restriction e.g, import quota:

Imports fall

NX rises

NX curve will shift to the right

As, the domestic real interest rate (r) remains same, CF remains same

ER however appreciates

Result:

Export falls

Thus trade restriction will not affect the trade balance (NX)

Initial equilibrium point E

At point E: S = I + CF

Supply of loanable fund (S) = demand for loanable fund (I + CF)

Interest rate → r₁ (Fig. 17.10 (a))

Impact of Import Quota:

Export increases

Import falls

Result:

NX curve shifts to the right from NX₁ to NX₂ (Fig. 17.10(c))

At given ER → є₁

NX is NX₂

As saving and Investment and CF are unaffected therefore, interest rate is unaffected, real interest rate (r) is r₁

CF is unaffected

But ER appreciates from є₁ to є₂ (Fig. 17.10(c))

Result:

Export falls; Import rises

Thus NX falls from NX₂ to NX₁

Conclusion:

Trade Restriction does not affect the trade balance.