1. Copyright © 2003 Pearson Education, Inc.Slide 5-1  Effects of an Export Subsidy Example: Suppose that Home offers 20% subsidy on the value of cloth exported: –The internal price of cloth relative to food faced by Home producers and consumers will be 20% higher than the external relative price of food on the world market. –At any given world relative price of cloth, then, Home producers will face a a lower relative cloth price and therefore will produce more cloth and less food (RS 1 to RS 2 ), at the same time, Home consumers will shift their consumption toward cloth and away from food. (RD 1 to RD 2 ) 說明 說明 A Home export subsidy worsens Home’s terms of trade and improves Foreign’s. Export Subsidies: Simultaneous Shifts in RS and RD

2. Copyright © 2003 Pearson Education, Inc.Slide 5-2 Export Subsidies: Simultaneous Shifts in RS and RD Figure 5-10: Effects of a Subsidy on the Terms of Trade Relative price of cloth, P C /P F Relative quantity of cloth, Q C + Q * C 返回 Export Subsidies 返回 Export Subsidies Q F + Q * F RS 1 RD 1 RD 2 RS 2 (P C /P F ) 1 1 (P C /P F ) 2 2

3. Copyright © 2003 Pearson Education, Inc.Slide 5-3  Implications of Terms of Trade Effects: Who Gains and Who Loses? The International Distribution of Income –If Home (a large country) imposes a tariff : –Tariffs hurt F. (worsens TOT) –the effect on H’s welfare is not quite as clear-cut. »benefits : improves TOT »costs : distorting production and consumption incentives within H’s economy –If Home offers an export subsidy: –Export subsidy leaves F better off. (improves TOT) –Export subsidy hurt H »worsens TOT »distorting production and consumption incentives within H’s economy Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD

4. Copyright © 2003 Pearson Education, Inc.Slide 5-4 The Distribution of Income Within Countries –A tariff (subsidy) has the direct effect of raising the internal relative price of the imported (exported) good, therefore, a tariff (subsidy) will help the import- competing (exporting) sector at Home while hurting the exporting (import-competing) sector. –Tariffs and export subsidies might have perverse effects on internal prices (Metzler paradox). Tariffs and Export Subsidies: Simultaneous Shifts in RS and RD

5. Copyright © 2003 Pearson Education, Inc.Slide 5-5 Summary  The standard trade model provides a framework that can be used to address a wide range of international issues and admits previous trade models as special cases.  A country’s terms of trade are determined by the intersection of the world relative supply and demand curves.  Economic growth is usually biased. Growth that is export-biased (import-biased) worsens (improves) the terms of trade.

6. Copyright © 2003 Pearson Education, Inc.Slide 5-6  International transfers of income may affect a country’s terms of trade, depending if they shift the world relative demand curve.  Import tariffs and export subsidies affect both relative supply and demand.  The terms of trade effects of an export subsidy hurt the exporting country and benefit the rest of the world, while those of a tariff do the reverse. Both trade instruments have strong income distribution effects within countries. Summary