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Suppose a small open economy is running a trade deficit and is considering implementing protectionist trade...

Suppose a small open economy is running a trade deficit and is considering implementing protectionist trade policies. What would you suggest? Support your suggestion(s) with a graph.

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Answer #1

If a small open economy considers implementing protectionist trade policy, search as a using import tariffs and quotas or import ban, then it is likely that the net exports are increased. However because the S-I curve does not change there is an upward shift of the net exports curve. This immediately appreciates the currency so that there is no change in the net exports. Hence the country remain in trade deficit. Thus there is no benefit for a small open economy to use trade protectionist policies

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