A trade policy is a government policy that directly influences the quantity of goods and services that a country imports or exports. Trade policy takes various forms. One common trade policy is a tariff, a tax on imported goods. Another is an import quota, a limit on the quantity of a good produced abroad that can be sold domestically. Trade policies are common throughout the world, although sometimes they are disguised. For example, the US. government has sometimes pressured Japanese auto makers to reduce the number of cars they sell in the .United States. These “voluntary export. restrictions” are not really voluntary and, in essence, are a form of import quota. Let’s consider the macroeconomic impact of trade policy. Suppose that the ‘US. auto industry, concerned about competition from Japanese automakers, convinces the US. government to impose a quota on the number of cars that can be imported from Japan. In making their case, lobbyists for the auto industry assert that the trade restriction would shrink the of the U.S. trade deficit. Are they right? Our model, as Iustrated in Figure 6, offers an answer.
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