A trade restriction is a rule that makes imports dearer or scarcer. To compare restrictions, describe the mechanism of each: what it changes, what happens to price and quantity, and who receives any revenue.
This lesson is part of globalisation and international trade. It follows explaining reasons for trade.
How do the main restrictions work?
| Restriction | Mechanism | Effect on import price | Who receives revenue |
|---|---|---|---|
| Tariff | A tax added to the price of imports | Rises by the tax | The government |
| Quota | A limit on the quantity imported | Rises because supply is capped | Usually importers who hold the licences |
| Embargo | A ban on trade with a country | Goods from that country disappear | No one |
The key difference is the route. A tariff acts on price first, and quantity falls as a result. A quota acts on quantity first, and price rises as a result.
Worked example: imported umbrellas
In the fictional Pulau Mutiara, imported umbrellas sell for RM20 and 400 are bought each week.
Tariff. The government adds a 25% tariff. The tariff is 25% of RM20, which is RM5, so the price becomes RM25.
At RM25, buyers choose to buy 300 umbrellas. The government collects 300 × RM5 = RM1 500.
Quota. The government instead limits imports to 300 umbrellas a week. At RM20, buyers want 400 but only 300 can be sold, so there is a shortage of 100. Competition among buyers pushes the price towards RM25.
Both restrictions give the same quantity, 300 umbrellas, and the same price, RM25. The difference is who gets the RM5 gap per umbrella. Under the tariff, it is the government. Under the quota, it goes to whoever holds the import licences, unless the government auctions them.
Which mistakes cost marks?
- Mixing the routes. Saying a quota is a tax.
- Forgetting revenue. Comparing the price effect but leaving out who receives the gap.
- One-sided answers. Naming only the local producers’ gain and missing the buyers’ cost.
Under stated assumptions, both restrictions can be shown on a single demand and supply diagram. The supply and demand diagram reasoning explorer lets you test the price gap.
Check yourself
Imported sandals sell for RM40. The government adds a 10% tariff. What is the new price, and how much revenue comes from each pair sold?
Answer
The tariff is 10% of RM40, which is RM4. The new price is RM44 and the revenue is RM4 per pair.
A quota limiting the same quantity would raise the price by a similar amount. The difference is that the RM4 would go to licence holders, not the government.
What to study next
The next lesson, interpreting exchange rate changes, shows another way import prices move. Test yourself in the globalisation and trade practice set.
If you want a teacher to compare mechanisms with you on fresh numbers, see online one-to-one Economics tuition.