Exchange Control Effect

Exchange control combined with import license give rice to monopoly profit to the importer in a country. Suppose in a country following strict exchange control an import imports commodity X. the situation of demand supply of X in the country is represented in 

PW is the world price of X. If there is no exchange control OQ will be imported to meet the consumers demand in the country represented by demand curve DC. This would need OPW EQ amount of foreign exchange.

However, under exchange control relapsing limited amount say OPWST (5 less than the required amount), the importers demand curve will be DM – a rectangular hyperbola curve – which is deviated from the consumer demand curve. Obviously supply is restricted to OT against OQ demand the domestic price of the imported commodity thus rises to PH. The difference between PH and PW is the monopoly rent accruing to the importer.

A steeper demand curve would imply a further monopoly rent profit to the importer.

It follows that exchange control reduce consumer welfare. It also encourages corruption to acquire import license and foreign currency license.

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