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I. Reading
Import quota
1. Definition
An import quota is a limit on the quantity of a good that can be produced
abroad and sold domestically.  It is a type of protectionist trade restriction that sets a
physical limit on the quantity of a good that can be imported into a country in a given
period of time. If a quota is put on a good, less of it is imported.  Quotas, like other
trade restrictions, are used to benefit the producers of a good in a domestic economy
at the expense of all consumers of the good in that economy.
2. Goals
The primary goal of import quotas is to reduce imports and increase domestic
production of a good, service, or activity, thus "protect" domestic production by
restricting foreign competition. As the quantity of importing the good is restricted, the
price of the imported good increases, thus encourages consumers to purchase
more domestic products. In general, a quota is simply a legal quantity restriction
placed on a good imported that is imposed by the domestic government.
3. Effects
 All production and consumption would be domestic. The diagram above
depicts the economic effects of trade barriers. If trade barriers are prohibitive, the
price would rise to P3 and Country A would have no imports. If Country A had no
barriers, the world price of P1 would prevail in the market. Country A's domestic
producers would supply Q1, and the country would import Q4 - Q1 from the rest of
the world. Import quota restrict the world supply in Country A, and raise the price to
P2. Domestic production increases to Q2, and imports are reduced to Q3 - Q2. The
total area (a + b + c + d) is a loss in consumer welfare due to the higher prices. The
red area (a) is called the redistribution effect, because domestic producers gain at the
expense of domestic consumers. The yellow area (c) is called the revenue effect. If
the trade barrier is a quota, then area (c) may accrue to either the government,
domestic importers, or foreign producers. It depends on the circumstances and
relative powers in the market. The combined gray areas (b + c + d) are known as the
net domestic loss.
Because the import quota prevents domestic consumers from buying an
imported good, the supply of the good is no longer perfectly elastic at the world price.
Instead, as long as the price of the good is above the world price, the license holders
import as much as they are permitted, and the total supply of the good equals the
domestic supply plus the quota amount. The price of the good adjusts to balance
supply (domestic plus imported) and demand. The quota causes the price of the good
to rise above the world price. The imported quantity demanded falls and the domestic
quantity supplied rises. Thus, the import quota reduces the imports.
Because the quota raises the domestic price above the world price, domestic
sellers are better off, and domestic buyers are worse off. In addition, the license
holders are better off because they make a profit from buying at the world price and
selling at the higher domestic price. Thus, import quotas decrease consumer surplus
while increasing producer surplus and license-holder surplus.
4. Classification
a. Absolute quotas
Absolute quotas limit the quantity of certain goods that may enter the
commerce during a specific period. Once the quantity permitted under an absolute
quota is filled, no further entries or withdrawals from warehouse for consumption of
merchandise subject to the quota are permitted for the remainder of the quota period.
b. Tariff-rate quotas
Tariff rate quotas permit a specified quantity of imported merchandise to be
entered at a reduced rate of duty during the quota period. There is no limitation on the
amount of merchandise that may be imported into a country, however quantities
entered in excess of the quota limit during that period are subject to a higher duty rate.
For example, a country may apply a tariff quota of 5% for the first 100,000
units of a good received each year, at which time the tariff increases to 10%.
(sources: http://en.wikipedia.org/wiki/Import_quota)
 II. Exercises
1. Definition
An import quota is a limit on the quantity of a good that can be produced abroad
and sold domestically.  It is a type of protectionist trade restriction that sets a physical (1)
limit on the quantity of a good that (2) can be imported into a country in a given period of
time. If a quota is put on a good, less of it is imported.  (3) Quotas, like other trade
restrictions, are used to benefit the producers of a good in a domestic economy at the
expense of all consumers of the good in that economy.

A government-imposed trade restriction that (1)

Key :
……. the number, or in certain cases the value, of goods
(1) Limits
and services that can be (2)……. during a particular
(2) Imported
time period.
3. Quotas are used to benefit the producers of a good in
F
a foreign economy at the expense of all consumers of
In a domestic economy
the good in that economy.

2. Goals
The primary goal of import quotas is to (4)reduce imports and increase domestic
production of a good, service, or activity, thus "protect" domestic production by
restricting (5)foreign competition. As the (6) quantity of importing the good is restricted,
the price of the imported good (7)increases, thus encourages consumers to purchase
more (8)domestic products. In general, a quota is simply a legal quantity restriction
placed on a good imported that is imposed by the domestic government.

A B
The primary goal of import quotas is to (4) a. Domestic
 ……. imports and increase domestic production of a good,
service, or activity, thus "protect" domestic production by
b. Foreign
restricting (5)…… competition. As the (6)…….. of
c. Increases
importing the good is restricted, the price of the imported
d. Quantity
good (7)…….., thus encourages consumers to purchase
e. Reduce
more (8)……. products. In general, a quota is simply a legal
quantity restriction placed on a good imported that is
imposed by the domestic government.
Key : 4-e; 5-b; 6-d; 7-c; 8-a

3. Effects

All production and consumption would be domestic. The diagram above depicts
the economic effects of trade barriers. If trade barriers are prohibitive, the price would
rise to P3 and Country A would have no imports. If Country A had no barriers, the world
price of P1 would prevail in the market. Country A's domestic producers would supply
Q1, and the country would import (9) Q4 - Q1 from the rest of the world. Import quota
restrict the world supply in Country A, and raise the price to P2. Domestic production
increases to Q2, and imports are reduced to (10) Q3 - Q2. The total area (11) (a + b + c +
d) is a loss in consumer welfare due to the higher prices. The red area (12) (a) is called
the redistribution effect, because domestic producers gain at the expense of domestic
consumers. The yellow area (13) (c) is called the revenue effect. If the trade barrier is a
quota, then area (c) may accrue to either the government, domestic importers, or foreign
producers. It depends on the circumstances and relative powers in the market. The
combined gray areas (14) (b + c + d) are known as the net domestic loss.

9. Country A's domestic producers would supply Q1, and the

country would import …….. from the rest of the world
A. Q4-Q1
A. Q4-Q1
B. Q4-Q3
C. Q3-Q2
D. Q3-Q1
10. Import quota restrict the world supply in Country A, and raise
the price to P2. Domestic production increases to Q2, and
imports are reduced to……
A. Q4-Q1 C. Q3-Q2
B. Q3-Q1
C. Q3-Q2
D. Q2-Q1

A B
11. Consumer Surplus a. (a)
12. The redistribution effect b. (c)
13. The revenue effect c. (b+c+d)
14. The net domestic loss d. (a+b+c+d)
Key : 11-d; 12-a; 13-b; 14-c

Because the import quota prevents domestic consumers from buying an imported
good, the supply of the good is no longer perfectly elastic at the world price. Instead, as
long as the price of the good is above the world price, the license holders import as much
as they are permitted, and the total supply of the good equals the domestic supply plus the
quota amount. The price of the good adjusts to balance supply (domestic plus imported)
and demand. The quota causes the price of the good to rise above the world price.
(15)The imported quantity demanded falls and the domestic quantity supplied rises. Thus,
the import quota reduces the imports.

15. What are the effects of Import quota will:

import quota?  decreasing the quantity supplied internationally
 increasing the quantity supplied domestically

(16)Because the quota raises the domestic price above the world price, domestic
sellers are better off, and domestic buyers are worse off. In addition, the license holders
are better off because they make a profit from buying at the world price and selling at the
higher domestic price. Thus, import quotas decrease consumer surplus while increasing
producer surplus and license-holder surplus.
16. Because the quota raises the domestic price F
above the world price, domestic sellers are worse domestic sellers are better off, and
off, and domestic buyers are better off. domestic buyers are worse off.
4. Classification
a. Absolute quotas
(17)Absolute quotas limit the quantity of certain goods that may enter the
commerce during a specific period. Once the quantity permitted under an absolute quota
is filled, no further entries or withdrawals from warehouse for consumption of
merchandise subject to the quota are permitted for the remainder of the quota period.

17. Absolute quotas limit the quantity of T

imports to a specified level during a Absolute quotas limit the quantity of
specified period of time. certain goods that may enter the commerce
during a specific period.

b. Tariff-rate quotas
Tariff rate quotas permit a (18) specified quantity of imported merchandise to be
entered at a reduced rate of duty during the quota period. There is (19) no limitation on
the amount of merchandise that may be imported into a country, however quantities
entered in excess of the quota limit during that period are subject to a higher duty rate.
For example, a country may apply a tariff quota of 5% for the first 100,000 units
of a good received each year, at which time the tariff increases to 10%.

18. Tariff-rate quota is a combination of T

an import tariff and an import quota Tariff rate quota permit a specified quantity
of imported merchandise to be entered at a
reduced rate of duty during the quota period
19. Tariff-rate quota is limitation on the F
amount of merchandise that may be Tariff-rate quota is no limitation on the
imported into a country amount of merchandise that may be
imported into a country