Understanding International Trade Restrictions and Economic Balance
International Trade Restrictions
Free trade worldwide faces restrictions. Some countries impose barriers to limit the entry of specific products, often to protect domestic industries.
These protective measures, also known as state intervention, can take various forms:
- Customs duties or tariffs
- Import quotas
- Export subsidies
Customs Duties (Tariffs)
Customs duties are import taxes, called tariffs, that restrict the entry of certain goods. This protects domestic industries or serves as a sanitary measure, preventing the spread of diseases (e.g., in the meat industry).
Import Quotas
Import quotas limit the quantity of specific goods that can be imported.
Export Subsidies
Export subsidies involve state-granted aid to producers, enabling them to export products or lower prices to gain a better position in the international market.
Balance of Payments
The balance of payments is an accounting record of a country’s economic transactions with the rest of the world over a specific period. These transactions can be conducted by individuals, both public and private.
The balance can be calculated in two ways:
- Expenditure approach
- Revenue approach
Expenditure Approach
This involves adding the consumption expenditure on goods and services provided by businesses to families.
Revenue Approach
This involves adding the revenue or income families receive for providing inputs, such as wages, rent, and interest.
Both approaches should align in terms of amounts, illustrating the simplified circular flow diagram involving families and businesses.
Circular Flow in an Economy
The circular flow in an economy can be represented by expanding sectors: the state or government sector and the external sector.
The circular flow includes payments from businesses to families for productive services and payments from families to companies for goods or services.
In a simplified example, we assume that all money received by households for production factors is fully spent on goods and services from companies. Companies, in turn, spend that same amount to generate new products (goods and services).
Thus, payments made by companies return as product purchases, production, and sales, resulting in macroeconomic balance.
If households save part of their income instead of spending it all on consumption, this must be compensated by an equal investment by firms, rather than relying solely on sales proceeds to continue production.
For example:
Compensatory Injections:
- Government expenditures (purchasing from companies)
- Desired investment (purchase of capital goods)
- Exports (sales of goods and services abroad)
Taxes, savings, and imports are considered leakages because the money obtained by families for providing inputs is not entirely intended for consumption expenditures of enterprises.
Therefore, to maintain macroeconomic balance, firms must make injections equal to the leakages produced by families.
Injections include:
- Desired investment by firms (e.g., accumulation of inventories or purchase of capital goods)
- Government procurement from the company sector equal in value to the taxes paid
- Exports or goods sold abroad that equal imports
If total injections equal total leakages, the circular flow model is in perfect balance.
National Income Product can be calculated in different ways.