The Kingdom of Tradia is a small, open, export-oriented country. Suppose initially that the world price of "stuff" is $150. Due to successful lobbying activities, Tradia "stuff" producers will now receive a subsidy of $25 per unit exported. Use the following graph to answer the following questions.
- Do you expect Tradia to export more with the subsidy? If so, by how much?
- What is the change in consumer surplus due to the subsidy?
- What is the change in producer surplus due to the subsidy?
- How does the subsidy affect welfare in Tradia?
- Now let's assume that the Peoples Republic of Exportia (PRE) is a small exporting country with demand for "stuff" and supply of "stuff" given by the following equations:
D = 100 - 5P and S = 10P - 50. Suppose the free trade world price is $12 per unit of "stuff".
- In the absence to any barriers to trade, what are the domestic consumption and production of "stuff"? How much is exported?
- Suppose the PRE government offers Exportian "stuff" producers an export subsidy of $3 per unit. In addition, the government imposes a tariff of $3 per unit on imports of "stuff". Calculate the price paid and quantity demanded by Exportian consumers.
- Calculate the net effect of the export subsidy on overall welfare in the PRE.