Export Subsidy: Small Country
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Export Subsidy - International Economics - Lecture Slides, Slides of Economics
Topics include in International Economics trade theory, tariffs and other protectionist policies, trade agreements between nations, the World Trade Organization, balance of payments, exchange rates, and the European Monetary Union. Key points for this lecture are: Export Subsidy, Welfare, Common Agricultural Policy, Europe's Cap, Policy Comparison
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2012/2013
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Export Subsidy: Small Country
Export Subsidy
- Trade under tariffs, though worse than free trade, is better than autarky,
- Trade accompanied by an export subsidy can be worse than autarky. - This is because the subsidy ends up costing the government instead of generating revenue.
- Also, unlike an import tariff, an export subsidy increases the amounts traded.
- This shows that increases in trade that are artificially instigated by governments can actually leave a country worse off.
Export Subsidy—Welfare
Autarky Free Trade
Export Subsidy
Consumer
Surplus
ABEF AB AB
Producer
Surplus
HI EFGHI BCEFGHI
Government -BCD
Total Surplus ABEFHI ABEFGHI ABEFGHI-D
Free Trade is best. Export Subsidy is better (worse)
than Autarky when G is bigger (smaller) than D. docsity.com
Europe’s (Un)Common Agricultural
Policy
- In the simple export subsidy that we’ve seen,
- producers can get more than the world price if they export
- consumers are still free to buy at the world price
- But, at times, the government not only subsidizes exports, it also puts a tariff on imports to equalize the price that domestic producers can get from domestic and foreign sales
- This is the case of Europe’s CAP.
- See ―Europe’s Common Agricultural Policy‖ in Chapter 8 of the textbook.
Policy Comparison
Free Trade Export Subsidy…
…Plus Tariff (CAP)
Consumer
Surplus
ABCFGH ABCFGH A
Producer
Surplus
I BCDI BCDI
Government -BCDEFG -CDEG
Total
Surplus
ABCFGHI ABCHI-E ABI-EG
Policy Comparison
- Total Surplus is
- ABCI in autarky
- ABCHI-E under export subsidy.
- Therefore, if H is smaller than E, the export subsidy could make things worse than under autarky
- ABI-EG under an export subsidy and import tariff combination (Europe’s CAP). - Therefore, this is worse than autarky, period.
- ABCFGHI under free trade. This is the best outcome.