Macroeconomics

‭access‬ ‭to‬ ‭these‬ ‭resources,‬ ‭closed‬ ‭economies‬ ‭may‬ ‭face‬ ‭challenges‬ ‭in‬ ‭effciently‬ ‭producing‬ ‭certain products.‬ ‭Alternatively,‬ ‭an‬ ‭open‬ ‭economy‬ ‭is‬ ‭one‬ ‭that‬ ‭takes‬ ‭part‬ ‭in‬ ‭international‬ ‭trade‬ ‭;‬ ‭therefore,‬ ‭its‬ ‭GDP‬ ‭measurement‬‭includes‬‭net‬‭exports‬‭(exports‬‭−‬‭imports):‬‭GDP‬‭=‬‭C‬‭+‬‭I‬‭+‬‭G‬‭+‬‭(X‬‭−‬‭M).‬‭Since‬‭the‬‭expanded‬ ‭circular‬ ‭flow‬ ‭of‬ ‭income‬ ‭explained‬ ‭in‬ ‭Chapter‬ ‭2‬ ‭Section‬ ‭B‬‭includes‬‭imports‬‭as‬‭leakages‬‭and‬‭exports‬‭as‬ ‭injections, it is a representation of an open economy.‬ ‭In‬ ‭an‬ ‭open‬ ‭economy,‬ ‭policymakers‬ ‭also‬ ‭consider‬ ‭trade‬ ‭policies,‬ ‭capital‬ ‭flows,‬ ‭and‬ ‭exchange‬ ‭rate‬ ‭management as tools to achieve macroeconomic objectives.‬ ‭The‬ ‭openness‬ ‭of‬ ‭an‬ ‭economy‬ ‭can‬ ‭bring‬ ‭both‬ ‭opportunities‬ ‭and‬ ‭challenges,‬ ‭such‬ ‭as‬ ‭increased‬ ‭export‬ ‭potential and exposure to global economic fluctuations.‬ ‭Tarifs, Quotas, and Subsidies‬ ‭Governments‬ ‭have‬ ‭the‬ ‭ability‬ ‭to‬ ‭influence‬ ‭the‬ ‭degree‬ ‭of‬ ‭openness‬ ‭of‬ ‭their‬ ‭economies.‬ ‭They‬ ‭can‬ ‭implement various policies to regulate international trade. For instance:‬ ‭●‬ ‭Quotas:‬ ‭Governments‬ ‭can‬ ‭impose‬ ‭restrictions‬ ‭on‬ ‭the‬ ‭quantity‬ ‭of‬ ‭specifc‬ ‭goods‬ ‭that‬ ‭can‬ ‭be‬ ‭imported‬ ‭or‬ ‭exported.‬ ‭Quotas‬ ‭limit‬ ‭the‬ ‭volume‬ ‭of‬ ‭international‬ ‭trade‬ ‭in‬ ‭certain‬ ‭sectors,‬ ‭and‬ ‭protect‬‭domestic‬‭producers.‬ ‭For‬‭example,‬‭the‬‭U.S.‬‭may‬‭limit‬‭the‬‭number‬‭of‬‭Chinese‬‭car‬‭imports‬‭to‬ ‭1‬‭million‬‭cars‬‭per‬‭year.‬‭This‬‭is‬‭an‬‭import‬‭quota‬‭that‬‭puts‬‭a‬‭restriction‬‭on‬‭the‬‭amount‬‭of‬‭cars‬‭that‬ ‭can be imported from a specifc country.‬

‭●‬ ‭Tariffs:‬ ‭Tariffs‬‭are‬‭taxes‬‭or‬‭duties‬‭imposed‬‭on‬‭imports.‬‭They‬‭can‬ ‭be‬ ‭used‬ ‭to‬ ‭protect‬ ‭domestic‬ ‭industries‬‭by‬‭making‬‭foreign‬‭goods‬ ‭more‬ ‭expensive‬ ‭for‬ ‭consumers.‬ ‭For‬ ‭example,‬ ‭to‬ ‭reduce‬ ‭corn‬ ‭imports‬ ‭and‬ ‭protect‬ ‭American‬ ‭corn‬ ‭farmers,‬ ‭the‬‭U.S.‬‭government‬ ‭may‬ ‭impose‬ ‭a‬ ‭2%‬ ‭tariff‬ ‭on‬ ‭imported‬ ‭corn,‬ ‭making‬ ‭them‬ ‭more‬ ‭expensive for American citizens.‬

‭●‬ ‭Subsidies:‬ ‭Governments‬ ‭may‬ ‭provide‬ ‭fnancial‬‭incentives,‬‭or‬‭subsidies,‬‭to‬‭domestic‬‭industries‬ ‭to‬ ‭make‬ ‭them‬ ‭more‬ ‭competitive‬ ‭in‬ ‭the‬ ‭global‬ ‭market.‬ ‭Subsidies‬ ‭can‬ ‭support‬ ‭the‬ ‭growth‬ ‭of‬ ‭specifc‬ ‭industries.‬ ‭For‬ ‭example,‬ ‭the‬ ‭U.S.‬ ‭may‬ ‭provide‬ ‭subsidies‬ ‭or‬ ‭fnancial‬ ‭incentives‬ ‭to‬ ‭American‬‭farmers‬‭to‬‭encourage‬‭the‬‭export‬‭of‬‭particular‬‭crops‬‭such‬‭as‬‭wheat‬‭or‬‭corn.‬‭By‬‭doing‬‭so,‬ ‭some‬‭of‬‭the‬‭American‬‭farmers’‬‭costs‬‭are‬‭offset,‬‭which‬‭increases‬‭their‬‭price‬‭competitiveness‬‭in‬‭the‬ ‭global market.‬ ‭Study Tip‬ ‭To‬ ‭reduce‬ ‭imports,‬ ‭import‬ ‭quotas‬ ‭should‬ ‭decrease,‬ ‭limiting‬ ‭the‬ ‭volume‬ ‭of‬ ‭imports‬‭allowed‬‭into‬‭the‬ ‭country.‬‭Meanwhile,‬‭import‬‭tariffs‬‭should‬‭increase‬‭to‬‭make‬‭imported‬‭goods‬‭more‬‭expensive‬‭and‬‭less‬ ‭competitive.‬

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