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.

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Definitions:

Institutional Buyers

Organizations that purchase goods and services in large volumes for operational purposes, not for individual consumption.

Purchasing Agents

Individuals or companies responsible for acquiring goods or services for their own use or for resale.

System

A set of interrelated components that work together to achieve a specific goal or function, organized within a framework or structure.

B₂C Marketing

Business-to-Consumer marketing, which involves selling products directly to consumers.