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Definition of an Embargo:
is a government ban on trade with a foreign country. Trade can be limited on all goods or specific goods.
An embargo restricts trade by prohibiting all importation or exportation of a particular good or service. In the short-run embargoes can create large shortages of the targeted goods. The reduced supply results in an increase in the equilibrium price and quantity of those goods, until the reduction in the global supply is replaced by another country. For example, the effect on the price of crude oil following an embargo on Iranian oil was reduced when other countries, such as Saudi Arabia, increased their production to diminish the shortage.
Embargoes are usually politically motivated and directed at only one country. The objective is to isolate a country and cause economic hardship as a way of motivating the government to change its behavior. In 1986 many European nations banned the importation of many materials including coal, iron and gold from South Africa. The United States followed with an embargo of its own. The objective was to pressure the South African government to end apartheid. It is debatable whether or not the embargo played a major or minor role in ending apartheid.
In 1979 President Carter froze Iranian assets following the seizure of the American Embassy and hostages in Tehran. Since 1979, trade sanctions were eased and imposed several times. The United Nations Security Council imposed sanctions in 2006 in an effort to pressure Iran to discontinue its development of nuclear weapons and support of the terrorist organization Hezbollah. The sanctions were lifted on January 16, 2016.
Most embargoes target imports, but occasionally an embargo, like the Arab Oil Embargo in 1973, restrict exports. The Arab members of OAPEC (Organization of Arab Petroleum Exporting Countries) refused to sell oil to the United States and its allies in response to the US decision to resupply the Israeli military during the Yom Kippur War (1973). The political unrest in the Middle East and restriction of supply caused oil prices to increase to record levels (at that time) in Europe, Japan, and the United States. The price increase triggered a slowdown in the world economies and a period of stagflation.
Dig Deeper With These Free Lessons:
Supply and Demand - The Costs and Benefits of Restricting Supply
Changes in Supply - When Producer Costs Change