I have a problem with the understanding of Export subsidies.
In the Schweser notes, there is a sentence that reads “Export subsidies benefit producers (exporters) of the good but increase prices and decrease consumer surplus in the exporting country”.
Why will export subsidies increase the prices in the exporting country? Shouldn’t subsidies lower the price instead?
Also, I don’t get why there is a difference in the change in price when the exporter is large or in a small country.
I believe that the idea is that if you encourage producers to export (e.g., with subsidies), then there will be less available to sell domestically; the subsidy will be used to lower the price of the exported goods, while the goods sold domestically will not receive the price benefit from the subsidy.
There may be more to it than that, but I haven’t a copy of the CFA Institute curriculum, so I cannot verify that.
For the second question, a small exporter cannot move the world price, whereas a large exporter can. Again, there may be more to it than that.
Export subsidies is to help the export country to be competitive in the world. For example. China can subsidies solar panels to be comeptitive with Germany. It helps China solar companies to compete on the world markets. Because Chinese solar panels can sell better outside China, the price of solar panels will increase inside China. Companies are better off exporting.