Export Subsidies and Economic Growth: Chains of Reasoning

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

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.