With the help of a diagram, explain how export subsidies may help promote economic growth in India.

Question 1

Intro

Answer 1

A subsidy is a form of financial assistance provided by the government to support a particular industry or sector. The purpose of a subsidy is to encourage the production or consumption of a particular good or service. And it can be used to boost domestic produce.

Question 2

P1

Answer 2

• Figure 1 shows the effect of a subsidy on India’s market for Cricket balls. As a result of the Subsidy the Cricket ball’s firms COPs reduce and therefore there is a downwards shift in the supply curve from S1 to S1+Sub.
• This causes the price which was originally at P1 to shift down to P2 as some of the subsidy is passed onto the consumer in the form of lower prices. The amount the consumer saves is P1-P2.

Question 3

P2

Answer 3

• There is still a loss of Consumer Surplus as consumers are not getting the full amount of the subsidy and the fairest price possible as the firm keeps that money (P3-P2).
• These lower prices would increase India’s cricket balls industry competitiveness and lead to an increase in aggregate demand.
• This increase in aggregate demand means that there is increased spending in the economy which can stimulate growth through the multiplier effect. Increased AD and consumption leading to growth may then lead to increased investments furthering economic growth (i.e the accelerator effect).

Question 4

Draw a Subsidy Diagram

Answer 4

Government Cost: P2, b, d, e
Producers - Old rev: P1, e, Q1,
Producers - New rev: e, d, Q2, 0
Consumers save: P1, P2, a, c
Consumers pay extra: Q1, Q2, c, b