Part 5 - Export Promotion

Question 1

Export promotion

Answer 1

All government’s activities that aim at promoting exports by firms.

Question 2

Export promotion policies include, but are not limited to:

Answer 2

• Export subsidies.
• Export credit guarantees.
• General economic policy.
• Export promotion programs.

Question 3

Governments around the world use a wide range of different policies to stimulate their firms’ exports, whereby these policies can be only of economic nature.

TRUE OR FALSE?

Answer 3

FALSE&raquo_space; Governments around the world use a wide range of different policies to stimulate their firms’ exports, whereby these policies can be of economic and/or political nature.

Question 4

An export subsidy is

Answer 4

a payment to a firm or individual that ships a good abroad (and can be specific or ad valorem). The subsidy payment comes from the government or a government agency

Question 5

What happens to price domestically and for the importing country when there is an export subsidy?

Answer 5

Export subsidy tend to put an upward pressure on domestic prices which means prices will rise from PW to PS and the price in the importing country falls from PW to P*S

Question 6

Impact of an export subsidy on prices compared to impact of tariffs:

Answer 6

Note that the impact of an export subsidy on prices is exactly the reverse of those of a tariff and terms of trade worsen (not potentially improve as in the case of a tariff), with the terms of trade loss being e + f + g.

Question 7

expected welfare due to export subsidy:

Answer 7

• consumers will be worst off in the domestic economy
• domestic producers will have an increase in the producer surplus
• costly bill to the government

Question 8

The EU’S Common Agricultural Policy (CAP) is in favor of the farmers or consumers?

Answer 8

EU’s Common Agricultural Policy (CAP) has been designed to guarantee high prices for European farmers.

Question 9

How CAP affects prices of agricultural products worldwide?

Answer 9

EU has started to subsidizes exports to dispose of excess production, which in turn reduces world prices of agricultural products.

Question 10

Consumer surplus vs producer surplus in EU agriculture:

Answer 10

The decrease in consumer surplus exceeded the increase in producer surplus by almost €22 billion in 2007.

Recent reforms: Farmers receive direct payments independent of the amount of production to help lower EU prices and reduce production.

Question 11

Why would the European Union be an importer of agricultural products under free trade?

Answer 11

Because many developing emerging markets in a number of agricultural goods would have a competitive advantage. So the EU would import more than export.

Question 12

The EU agreed to eliminate export subsidies on agricultural goods in 2015, TRUE or FALSE?

Answer 12

TRUE

Question 13

Why did it take so long to eliminate the export subsidies and rain back on certain aspects of the CAP?

Answer 13

The farmers gained political cloud overtime and made it harder to reform the CAP and eliminate the export subsidies in Europe

Question 14

3 of the 10 top trading partners of the U.S. in 2015 were also the largest European Economies, they are:

Answer 14

Germany, United Kingdom and France.

Question 15

Is there any correspondence between the economic size and trade flows?

Answer 15

Yes, there is a correspondence between the economic size of different European economies and those countries’ trade with the United States. Examples are Germany, UK and France.

Question 16

Is distance important in the gravity model?

Answer 16

Yes, distance is one of the two ingredients when it comes to the gravity model. But also Regional Trade Agreements (RTAs).

Question 17

According to the gravity model of international trade, there are two main determinants of (bilateral) trade volume:

Answer 17

• Economic Size

* Distance

Question 18

Explain the importance of Economic size in the gravity model:

Answer 18

• Larger economies produce more goods and services, so they have more to sell in the export market.
• Larger economies generate more income from the goods and services sold, so they are able to buy more imports.

Question 19

Explain the importance of Distance in the gravity model:

Answer 19

The distance between markets influences transportation costs and therefore the cost of imports and exports.

Transportation costs or trading costs rise with distance.

Question 20

Origin of the gravity model name:

Answer 20

Name refers to Newton’s law of gravity in physics.

Question 21

In its basic form, the gravity model assumes that only size and distance are important for trade. TRUE OR FALSE?

Answer 21

TRUE

Question 22

Gravity Model Formula:

Answer 22

Tij= A x Yix Yj/Dij where
•Tij is the value of trade between country I and country j
• A is a constant
•Yi the GDP of country i
• Yj is the GDP of country j
• Dij is the distance between country I and country j

Or more generally
Tij= A x Yia x Yjb/Dijc

where a, b, and c are allowed to differ from 1.

Question 23

Important difference between the cross-sectional and panel model:

Answer 23

Only the panel model has a time-dimension. In the panel model, we observe the same unit of observation at least in two different time periods.

Question 24

Regression models:

Answer 24

Partial effect, i.e., the effect of an explanatory on the dependent variable, holding other factors in the regression model fixed.

Question 25

Estimates of the effect of distance from the gravity model predict that a 1% increase in the distance between countries is associated with a decrease…

Answer 25

in the volume of trade of 0.7% to 1%.

Question 26

Further determinants of (bilateral) trade volume (beyond economic size and distance):

Answer 26

• Cultural affinity: If two countries have cultural ties, it is likely that they also have strong economic ties.
• Geography: Ocean harbors and a lack of mountain barriers make transportation and trade easier.
• Borders: Crossing borders involves formalities that take time and perhaps monetary costs like tariffs.
• Regional trade agreements (RTAs) between countries are intended to reduce the formalities and tariffs needed to cross borders, and therefore

Question 27

“Gravity has long been one of the most successful empirical models in economics […]” who said that?

Answer 27

Anderson, 2010