Management Notes

Reference Notes for Management

A specification of a maximum amount of a foreign produced good that will be allowed to enter the country over a given time period is referred to as a (an):

A specification of a maximum amount of a foreign produced good that will be allowed to enter the country over a given time period is referred to as a (an):


a. domestic subsidy
b. export subsidy
c. import quota
d. export quota

The Correct Answer Is:

c. import quota

Import quotas are a crucial tool in international trade policy, serving as a specification of the maximum amount of a foreign-produced good that is allowed to enter a country over a defined time period. This mechanism is deployed by governments to regulate the flow of goods into their domestic markets, impacting supply and demand dynamics, pricing, and competition.

The correct answer to the question is indeed option c, “import quota,” and this essay will elucidate why this is the case. Additionally, it will expound upon the reasons why the other options, namely domestic subsidy (a), export subsidy (b), and export quota (d), are not suitable substitutes for import quotas.

c. Import Quota: 

An import quota serves multiple purposes in international trade. Firstly, it shields domestic industries from foreign competition, enabling them to establish and consolidate their presence in the market. This protection is particularly important for infant industries that may not have the capacity to compete with established foreign counterparts.

By limiting the quantity of imports, domestic industries can thrive and grow, eventually becoming globally competitive.

Secondly, import quotas can be used as a strategic tool to manipulate the balance of trade. By controlling the volume of imports, a country can influence its trade balance, which is the difference between the value of exports and imports.

If a country aims to reduce its trade deficit, for instance, it may implement import quotas to curtail the inflow of foreign goods, thereby bolstering domestic production and reducing the reliance on imports.

Furthermore, import quotas are a way to safeguard national security interests. Certain industries, such as defense or critical infrastructure, are deemed strategically vital to a nation’s security. Relying on foreign suppliers for such goods can leave a country vulnerable to disruptions in the global supply chain. Implementing import quotas ensures that a country maintains a level of self-sufficiency in key sectors.

Why the Other Options Are Not Correct

a. Domestic Subsidy:

A domestic subsidy involves the government providing financial assistance or incentives to domestic industries or producers. While subsidies can protect domestic industries, they do so by lowering production costs or bolstering competitiveness.

This is different from an import quota, which directly restricts the quantity of foreign goods that can enter the domestic market. Moreover, subsidies can lead to market distortions and may be subject to challenges under international trade agreements.

b. Export Subsidy:

An export subsidy involves the government providing financial incentives to domestic producers to encourage the export of goods. This is essentially the opposite of an import quota.

Export subsidies are used to make domestic goods more competitive in international markets. They do not directly regulate the quantity of imports into a country, making them fundamentally different from import quotas.

d. Export Quota:

An export quota, on the other hand, is a limitation imposed by a country on the quantity of goods that can be exported. This is a measure taken by a country to ensure that enough of a particular good remains within its borders.

While export quotas have their own economic implications, they are distinct from import quotas. An export quota restricts the outflow of domestic goods, while an import quota restricts the inflow of foreign goods.

In summary, an import quota is a pivotal tool in regulating international trade, allowing governments to control the volume of foreign goods entering their domestic markets. It serves purposes ranging from protecting domestic industries to influencing trade balances and ensuring national security.

The other options – domestic subsidy, export subsidy, and export quota – serve different functions and are not interchangeable with import quotas. Each of them addresses a different aspect of trade policy and has its own set of implications.

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