Institut für Höhere Studien (IHS), Wien
Institute for Advanced Studies, Vienna

Reihe Ökonomie / Economics Series No. 75
October 1999

View full text:  es-75.pdf
 

A Welfare Comparison Between Export Subsidies and Exchange Rate Depreciation

Adelina Gschwandtner
 
 

Institut für Höhere Studien
Stumpergasse 56, A-1060 Wien
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Adelina Gschwandtner
BWZ - Department of Economics
University of Vienna
Bruennerstr. 72, A-1210 Wien
Phone: +43/1/4277-37480
Fax: +43/1/4277-37498
E-mail: Adelina.Gschwandtner@univie.ac.at
 

Institut für Höhere Studien (IHS), Wien
Institute for Advanced Studies, Vienna
The Institute for Advanced Studies in Vienna is an independent center of postgraduate training and research in the social sciences. The Economics Series presents research carried out at the Department of Economics and Finance of the Institute. Department members, guests, visitors, and other researchers are invited to submit manuscripts for possible inclusion in the series. The submissions are subjected to an internal refereeing process.

Editorial Board
Editor:
Robert M. Kunst (Econometrics)
Associate Editors:
Walter Fisher (Macroeconomics)
Klaus Ritzberger (Microeconomics)
 

Abstract

This paper develops a Bertrand price competition model with differentiated goods in which export subsidies are compared to exchange rate depreciation as different government policies for promoting exports. National governments may wish to help domestic firms to expand market shares in profitable areas and might do this through either one of these two tools. Their effects on equilibrium values are analyzed and compared. It is shown that while the two examined trade policies give rise to the same highest welfare, they could produce some significant differences according to circumstances. If the exchange rate is sufficiently high and the level of the nominal wage sufficiently low, the marginal effect of the subsidy will be higher. But if unions are strong (and demand a high nominal wage) and the exchange rate is sufficiently low, the governments could also consider a depreciation as an alternative policy to export subsidies.

Keywords
Export subsidies, exchange rate depreciation, international trade, Bertrand competition

JEL Classifications
F13, F31

Comments
I would like to thank Guiseppe Colangelo for supervising this paper and helping me with his very useful comments and ideas. I would also like to thank Leo Kaas for reviding this paper and finding a much easier way to prove one of the final results. His idea is presented in Appendix A.3.