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Export Subsidies and Economic Growth: Chains of Reasoning

AS, A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 30 Jan 2022

In this video we analyse and evaluate the use of export subsidies as a way of stimulating economic growth.

Export Subsidies and Economic Growth: Chains of Reasoning

Analyse how export subsidies may help promote economic growth

  • An export subsidy involves government financial support to producers. The subsidy often involves a guaranteed minimum payment for output earmarked for exporting to other countries.
  • The subsidy might also be a payment to lower the costs of growers so that they can then reduce the prices of their exports when priced in an overseas currency.
  • For example, the Indian Government has provided extensive support to sugarcane growers and sugar producers. It has also offered a generous interest-payment subsidy to rice exporters.
  • The main effect of a cost-reducing subsidy is to increase market supply at a micro level and cause an outward shift of short-run aggregate supply. Rice and sugar are two key industries in the Indian economy.
  • And a subsidy can also lead to increased overseas demand for and spending on exports such as sugar and rice which will then cause an outward shift of aggregate demand.
  • In both cases, increased SRAS and rising AD - in theory - will lead to faster economic growth especially if a rise in exports leads to increased employment, incomes and investment.

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