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A Welfare Comparison Between Export Subsidies and Exchange Rate Depreciation

Author

Listed:
  • Gschwandtner, Adelina

    (BWZ - Department of Economics, University of Vienna)

Abstract

This paper develops a Bertrand Price Competition model with differentiated goods in which export subsidies are compared to exchange rate depreciation as different government policies for promoting exports. National governments may wish to help domestic firms to expand market shares in profitable areas and might do this through either one of these two tools. Their effects on equilibrium values are analyzed and compared. It is shown that while the two examined trade policies give rise to the same highest welfare, they could produce some significant differences according to circumstances. If the exchange rate is sufficiently high and the level of the nominal wage sufficiently low, the marginal effect of the subsidy will be higher. But if unions are strong (and demand a high nominal wage) and the exchange rate is sufficiently low, the governments could also consider a depreciation as an alternative policy to export subsidies.

Suggested Citation

  • Gschwandtner, Adelina, 1999. "A Welfare Comparison Between Export Subsidies and Exchange Rate Depreciation," Economics Series 75, Institute for Advanced Studies.
  • Handle: RePEc:ihs:ihsesp:75
    as

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    File URL: http://www.ihs.ac.at/publications/eco/es-75.pdf
    File Function: First version, 1999
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    References listed on IDEAS

    as
    1. Maggi, Giovanni, 1996. "Strategic Trade Policies with Endogenous Mode of Competition," American Economic Review, American Economic Association, vol. 86(1), pages 237-258, March.
    2. Schwartz, Marius, 1987. "The Competitive Effects of Vertical Agreements: Comment," American Economic Review, American Economic Association, vol. 77(5), pages 1063-1068, December.
    3. Brander, James A. & Spencer, Barbara J., 1985. "Export subsidies and international market share rivalry," Journal of International Economics, Elsevier, vol. 18(1-2), pages 83-100, February.
    4. Vives, Xavier, 1984. "Duopoly information equilibrium: Cournot and bertrand," Journal of Economic Theory, Elsevier, vol. 34(1), pages 71-94, October.
    5. Alan Kirman & Louis Phlips, 1996. "Exchange-rate pass-through and market structure," Journal of Economics, Springer, vol. 64(2), pages 129-154, June.
    6. Jonathan Eaton & Gene M. Grossman, 1986. "Optimal Trade and Industrial Policy Under Oligopoly," The Quarterly Journal of Economics, Oxford University Press, vol. 101(2), pages 383-406.
    7. Mathewson, G Frank & Winter, Ralph A, 1987. "The Competitive Effects of Vertical Agreements: Comment," American Economic Review, American Economic Association, vol. 77(5), pages 1057-1062, December.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Keywords

    Export susidies; Exchange rate depreciation; International trade; Bertrand competition;

    JEL classification:

    • F13 - International Economics - - Trade - - - Trade Policy; International Trade Organizations
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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