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Export Subsidy: Two Countries

Export Subsidy: Two Countries. Udayan Roy http://myweb.liu.edu/~uroy/eco41 September 2006. The price for Japan’s producers increases, but by less than the subsidy. Exports. Imports. Net Trade. Price ( in Europe). E. A. F. G. B. H. I. C. J. D. The price in Europe falls.

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Export Subsidy: Two Countries

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  1. Export Subsidy: Two Countries Udayan Roy http://myweb.liu.edu/~uroy/eco41 September 2006

  2. The price for Japan’s producers increases, but by less than the subsidy. Exports Imports Net Trade Price (in Europe) E A F G B H I C J D The price in Europe falls. Quantity Japan implements an export subsidy This causes its supply to, in a sense, fall by the extent of the subsidy. Japan Europe

  3. Export Subsidy: Two Countries Case

  4. Export Subsidies Create Fake Trade • Subsidies are the opposite of a tax; they reward rather than punish • Export subsidies reward domestic producers for the goods that they export • This artificially boosts the nation’s levels of trade • The country may export its entire output of a commodity and then import back the same commodity for its own use!

  5. Fake Trade is Bad • The fake trade induced by export subsidies reduces the nation’s welfare (by G) and … • … may even leave it worse off under trade than in autarky

  6. Gains and Losses • When a country imposes an export subsidy, it is affected as follows: • Producers gain (EF) • Consumers gain (HI) • The country as a whole loses (G), because the cost of the subsidy (EFGHI) are not worth the benefits (EFHI)

  7. Gains and Losses • When a country imposes an export subsidy, the other country is affected as follows: • The price of its imported good decreases. As a result, • Consumers gain (BC) • Producers lose (B) • The country as a whole is better off (C)

  8. Export Subsidy and Welfare • When one country implements an export subsidy, that country is worse off (G) • The other country is better off (C) • The losses of the worse-off country (G) are larger than the gains of the better-off country (C). So, the world as a whole is worse off.

  9. Textbook • For more on this topic, see “Export Subsidies: Theory” in Chapter 8, pages 197-199.

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