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CA Foundation · Business Economics · International Trade

India gives an export subsidy on a product, lowering its price in the world market. Which of the following is the most likely consequence for India?

Domestic taxpayers bear the cost while foreign consumers benefit from lower prices, and India's terms of trade deteriorate. An export subsidy lowers the export price relative to import prices and is a government expenditure, not revenue.

  1. ADomestic taxpayers bear the cost while foreign consumers gain from lower prices, so India's terms of trade deteriorateCorrect
  2. BForeign consumers lose because the world price rises, so India's terms of trade improve
  3. CIndia's government earns revenue equal to the subsidy
  4. DDomestic consumers necessarily gain because the domestic price falls

Explanation

An export subsidy lowers the price at which India sells abroad, so export prices fall relative to import prices and terms of trade worsen. The fiscal cost is borne by domestic taxpayers, while foreign buyers benefit. Option B has the price direction reversed, and C is wrong since a subsidy is an expenditure.

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