Chapter 7 summary
1.An export subsidy by a small country leads to the rise of domestic price, which will in turn
lead to a decrease of consumer surplus and an increase of producer surplus.Government expenditures increase because of export subsidy.The imposing country suffers a deadweight lo.
2.The deadweight lo of an export subsidy by a large country is greater than that of a small
country, as the increase of exports by a large country leads to a drop of world price which deteriorates its terms of trade.
3.Production subsidy is different from export subsidy in that it provides a payment based on all
production regardle of where it is sold.The price paid by the consumers remains equal to the free trade price, and there is no consumer surplus lo.But producer surplus increases because of the price they receive is the sum of the consumer price and the subsidy.Government revenue decreases because of the subsidy.The net welfare effect is a deadweight lo.From the perspective of the whole social welfare, production subsidy is better than export subsidy.But production subsidy requires more expenditure by the government than export subsidy.
4.Other measures regarding export promotion are: devaluation of home currency, commodity
dumping, special trade zones and export promotion programs.
5.There are several objectives of restricting exports.Export taxes and quotas are the two major
approaches.The effects of an export tax in a small country are: consumer surplus increases, producer surplus decreases, government revenue increases and the whole welfare effect is a deadweight lo.But the whole welfare effect of an export tax in a large country might be positive.If the exporting country is a large country, the reduced supply of exports on the world market results in an increase in the international price.Thus, the export price for the exporting country rises, the terms of trade of the country improve.Other effects to the country are the same as in the setting of a small country.
6.The effects of an export quota are similar to those of an export tax.The difference is no
government revenue is neceity collected.The recipient of the quota rent is unclear.
7.There are several objectives of promoting import.Promotion measures include import
subsidies, consumption subsidies on imported products and production tax on the import-competing industries.
8.The most important determinants of the succe of trade sanctions are: the number of
imposing nations, the degree of economic, political and cultural ties between the target nation and the imposing nation(s).
Export subsidy
Price subsidy
Production subsidy
Devaluation of home currency
Sporadic dumping
Predatory dumping
Persistent dumping
Bonded warehouse
Special trade zone
Trade sanctionsExport tax
