In class we talked about the effects or tariffs and subsidy's on a country and the overall outcomes were quite surprising to us all. I wanted to look more into the outcome of giving a subsidy to a large country involved in international trade. I found this scholarly article Export subsidies and international market share rivalry.
The authors of this article brought up the idea that we all assumed at the start of class which was that why wouldn't a subsidy be good for a country's welfare? The initial improvements to the home firms outputs in production are positive, however this is without competition from foreign firms. As the authors commented "A subsidy changes the initial conditions of the game firms play." With the subsidy the number of exports increase and producers surplus increases also, these are the only preserved positives of the subsidy. With the increase in supply of the subsidised product the price that the home country can sell the product will decrease, this means that the home country are basically helping out all the home countries by selling them their exports for cheaper prices. The only ones that lose out are the home country because they lose profits selling the product at a cheaper price. The decrease is price then leads to a decrease in the terms of trade for the home country and welfare is reduced.
Government intervention in trade never seems to have a positive impact. We need the government their to support our firms, however tariffs and subsidies need to be limited.
I think the idea of export subsidies and it being good for the country is a common misconception. we are told by the media what to think lately and it gets instilled in the heads of the common observer. I like the fact that we are learning the true cause and effect of principles and policies that are brought upon us. we just need to differentiate the truth from false statements and try to help.people understand that want to learn. good post!
ReplyDeleteThe more that we learn in this class, the more thankful I am for having taken it. Today, the various media that we are exposed to are full of trade misconceptions. While the subject of international trade is challenging, it is a very important subject to be knowledgeable about in our globalized society.
ReplyDeleteI agree with what Ben said about taking this class. I think we have all learned a lot and have a new perspective on how international trade works and how we can figure out fact from fiction in the media.
ReplyDeleteI agree with what Ben said about taking this class. I think we have all learned a lot and have a new perspective on how international trade works and how we can figure out fact from fiction in the media.
ReplyDelete