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Chapter 20: Q. 2 (page 489)

Explain how a subsidy on agricultural goods like sugar adversely affects the income of foreign producers of imported sugar.

Short Answer

Expert verified

Income of foreign producers of imported sugar would go down.

Step by step solution

01

Step1. Introduction

Subsidies refer to concessions, mostly monetary, given by the government to help aid and reduce cost of production of producers and hence improve their profit margin.

02

Step2. Explanation

When subsidies are given on agricultural products like sugar, it reduces the cost of production. As cost of production falls, the producers can either earn higher profits or reduce the prices and enjoy higher sales.
If the producers choose to reduce the prices, the imports will now be relatively expensive and people would demand less of imports. This would hence reduce the income of foreign producers of imported sugar, thus adversely affecting their business.

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Most popular questions from this chapter

Trade has income distribution effects. For example,

suppose that because of a government-negotiated

reduction in trade barriers, trade between Germany and the Czech Republic increases. Germany sells house paint to the Czech Republic. The Czech Republic sells alarm clocks to Germany. Would you expect this pattern of trade to increase or decrease jobs and wages in the paint industry in Germany? The alarm clock industry in Germany? The paint industry in Czech Republic? The

alarm clock industry in Czech Republic? What has to happen for there to be no increase in total unemployment in both countries?

Who gains and who loses from trade?

In principle, the benefits of international trade to a country exceed the costs, no matter whether the country is importing or exporting. In practice, it is not always possible to compensate the losers in a country, for example, workers who lose their jobs due to foreign imports. In your opinion, does that mean that trade should be inhibited to prevent losses?

What are some examples of innovative products that have disrupted their industries for the better?

Microeconomic theory argues that it is economically rationale (and profitable) to sell additional output as long as the price covers the variable costs of production. How is this relevant to the determination of whether dumping has occurred?
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