Question

C or D， Thank you

If a large country in the world trade instituted a large set of subsidies for its exports, this must Select one: o A. decrease its marginal propensity to consume. O B. have no effect on its terms of trade. O C. harm world terms of trade. D. harm its teams of trade. E. improve its terms of trade.

Answer 1

(D) Harm it's terms of trade

Reason:

Export subsidy effects on the exporting country’s consumers: Consumers of the product in the exporting country experience a decrease in well-being as a result of the export subsidy. The increase in their domestic price lowers the amount of consumer surplus in the market.

Export subsidy effects on the exporting country’s producers: Producers in the exporting country experience an increase in well-being as a result of the subsidy. The increase in the price of their product in their own market raises producer surplus in the industry. The price increase also induces an increase in output, an increase in employment, and an increase in profit, payments, or both to fixed costs.

Export subsidy effects on the exporting country’s government: The government must pay the subsidy to exporters. These payments must come out of the general government budget. Who loses as a result of the subsidy payments depends on how the revenue is collected. If there is no change in total spending when the subsidy payments are made, then a reallocation of funds implies that funding to some other government program is reduced. If the subsidy is funded by raising tax revenues, then the individuals responsible for the higher taxes lose out. If the government borrows money to finance the subsidy payments, then the budget cut or the tax increase can be postponed until some future date. Regardless of how the subsidy is funded, however, someone in the domestic economy must ultimately pay for it.

Export subsidy effects on the exporting country: The aggregate welfare effect for the country is found by summing the gains and losses to consumers and producers. The net effect consists of three components: a negative terms of trade effect (f + g + h), a negative consumption distortion (b), and a negative production distortion (d).