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An Export Subsidy Has the Opposite Effect on Terms of Trade

question 1

Essay

An export subsidy has the opposite effect on terms of trade to the effect of an import tariff. Domestically a tariff will raise the price of the import good, deteriorating the domestic terms of trade. A production subsidy for the export product will lower the local price of the export good, lowering the domestic terms of trade for the country. Hence the export subsidy and the import tariff have the same effect. This analysis seems to contradict the first sentence in this paragraph. Discuss this paradox.


Definitions:

Ownership Interest

A legal or beneficial right of possession or control over property, giving the holder certain enforceable rights.

Corporate Stock

Shares representing ownership in a corporation, with holders often entitled to receive dividends and vote on corporate matters.

Shareholder

A person or entity that owns part of a company through the possession of one or more shares of its stock.

Director

A person elected by the shareholders to direct corporate affairs.

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