Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
A Numerical Example of the Effects of an Export Subsidy A partial equilibrium approach similar to that adopted in Chapter 4 for tariffs can be used to analyse the effects of introducing an export subsidy. For simplicity it is assumed that the country in question is a small nation, and the usual assumptions are made with regard to linear demand and supply curves, and no stocks or externalities. In conditions of free trade it is assumed that the world price (Pw) is 100 euro per tonne and the initial quantity supplied by the country (Qs) is 2000 tonnes, while the quantity demanded is 1000 tonnes. The price elasticity of demand (Ed) is –0.5 and the price elasticity of supply is Es 1.0. An export subsidy of 20 euro per tonne is then introduced and competition between exporters will cause the price on the domestic market to rise from 100 to 120 which is the new domestic price (Pd) both for producers and consumers. The formula for supply elasticity can be used to calculate the new quantity supplied Q’s by the country in question after introduction of the export subsidy: Es = Qs Qs P P Qs Qs = Es P P P = 20 P = 100 Es = 1,0 Qs = 2000 Qs = 2000 (1,0 x 20/100) = 400 Q's = 2000 + 400 = 2400 The formula for price elasticity of demand can also be used to calculate the new quantity demanded Qd after introduction of the export subsidy: Ed = Qd Qd P P Qd = Qd (Ed P) P Q'd = 1.000 - 100 = 900t Qd = 1.000 (-0,5 x 100 20 ) = -100 Figure A10.1 The effects of an export subsidy P S Pd=120 a b c Pw=100 D 0 900 1000 2000 2400 Foreign trade without the export subsidy (i.e. net exports) is given by: Qs - Qd = 2000 - 1.000 = 1000 t With the export subsidy it becomes: Q's - Q'd = 2400 – 900 = 500 Before introduction of the export subsidy producer revenue is: Qs(Pw) = 2000(100) = 200000 With the export subsidy it becomes: Q’s(Pd) = 2400(120) = 288000 Before the introduction of the export subsidy consumer expenditure is: Qd(Pw) = 1000(100) = 100000 After the introduction of the export subsidy it becomes: Q’d (Pd) = 900(120) = 108000 Before the introduction of the export subsidy the trade balance is: (Qs-Qd)Pw = 100000 With the export subsidy it becomes: (Q’s-Q’d) Pw = (2400-900)100 = 50000 Q N.B. It is the world price which is used to calculate the trade balance; the domestic price is used to calculate producer revenue and consumer expenditure. The loss in consumer surplus is given by: - 0,5 (Pd - Pw) (Qd + Q'd) = -0.5(20(1000+900) = -19000 The increase in producer surplus is given by: 0,5 (Pd - Pw) (Qs + Q's) = 0,5 (20(2000+2400)) = +44000 The impact on the government budget (or the income of taxpayers) is the rectangle comprised of areas a, b and c: -(Pd-P’w)(Q’s-Q’d) = -20(2400-900) = -30000 The total effect of introducing the export subsidy on welfare is given by: loss in consumer surplus, plus the increase in producer surplus and the increase in government revenue: -19000 + 44000 – 30000 = -5000 Alternatively, the effect of introducing the export subsidy on total welfare can be calculated using the net welfare effects: Triangle a is the net loss of welfare on the consumer side: = - 0,5 (Pd - Pw) (Qd – Q’d) = - 0,5 (120-100)(1000-900) = -1000 Triangle c is the net loss of welfare on the production side (reflecting the worsening in the allocation of resources): = - 0,5 (Pd -Pw) (Q's - Qs) = - 0,5(20(2400-2000) = - 4000 The total effect on welfare is: -1000-4000 = -5000 In the case of a fall in world prices (because net exports from the country in question increase following introduction of the export subsidy) there will be a transfer from producers in that country to consumers in the rest of the world causing a negative effect on total welfare of the country in question. In the case of a rise in world prices (because net exports from the country decrease after elimination of the export subsidy) there will be a transfer from consumers in the rest of the world to producers in that country causing a positive effect on net welfare of the country in question.