Trade subsidy - trade protectionism

• What is a trade subsidy?

  Subsidy to domestic suppliers to reduce production cost
• Why are trade subsidies considered a sneaky form of protectionism?

  They are hard to prove
• What happens to the supply curve when a subsidy is imposed?

  It shifts downwards
• Which supply curve shifts downwards when a trade subsidy is given?

  The domestic supply curve
• On a trade subsidy diagram, what does the vertical distance between the two supply curves represent?

  The value of the subsidy
• With a trade subsidy, does the market price change directly?

  No, the price stays the same
• With a trade subsidy, what is the effective price received by domestic suppliers?

  World price plus the subsidy
• What is the value of the subsidy in terms of the effect it has on domestic price?

  The vertical distance between supply curves
• How does a trade subsidy impact consumer demand?

  It does not change consumer demand
• How does a trade subsidy impact domestic supply?

  It increases domestic supply
• What does the shaded triangle in the trade subsidy diagram represent?

  Dead weight welfare loss
• Why does a trade subsidy lead to a deadweight welfare loss?

  Inefficient producers are producing extra units
• According to the text, why should the increase in supply caused by trade subsidies not take place?

  Inefficient domestic suppliers produce units
• How does a trade subsidy relate to the infant industry argument for protectionism?

  Domestic firms may grow in size
• How does a trade subsidy reduce the chances of suffering from dumping?

  There are less imports coming in
• What is the expected impact of a trade subsidy on domestic employment?

  Domestic employment will increase
• According to the text, what is the impact of domestic supplies increasing?

  It reduces the need for imports
• How should a trade subsidy affect the current account position?

  It should improve it
• What is the aim of a trade subsidy in relation to competition?

  Help domestic firms compete globally
• What are the steps to draw a trade subsidy diagram effectively?

  • Start with a given quantity (Q3).
  • Move up to the original domestic supply curve.
  • Move across to the domestic demand curve.
  • Draw the new supply curve (domestic + subsidy) parallel to the original.
• What assumption is made about the size of the trade subsidy in the analysis?

  It's not large enough to change world price
• How are resources misallocated due to trade subsidies?

  Inefficient producers use more resources
• How might trade subsidies lead to economies of scale?

  Firms grow and reduce per-unit costs
• How does reduced import expenditure improve the current account?

  It increases net exports