I must thank you for your outstanding explanation and for clarifying the difference between production subsidy and export subsidy at the very beginning.
However, I do have a question and doubt that domestic consumer price will increase. Because the world price is Pw. If domestic producer sell at Pc (in your graph), then consumers will import from the world at Pw Price. So domestic producer will export all their production to the world market and domestic consumers will import the amount from the world where Pw intersects the demand curve. In an open economy, there is no restriction on Imports and exports. Many other countries will be willing to export the good at Pw price. For example, suppose the oil price in the world market is $100 per barrel. The US government will give a $5 subsidy on each unit of export. So the US oil producer will get $105 for every barrel they export in the world. $100 from the world and $5 from the government. If US domestic oil producer wants to sell at $105 in the domestic market, then foreign oil producers like Saudi Arabia will export to the US at $100. So domestic consumers will consume entirely Saudi oil at $100 and purchase none of the US producer oil. And US producer will export their entire production in the world since they can make $105 per barrel. Please explain if I am wrong and why I am wrong?
Your analysis is insightful, but there are a few nuances to consider in the context of international trade and pricing. Your example highlights the impact of subsidies on exports and how they can affect the competitiveness of domestic producers in the global market. Let's break down the key points and address the potential misconceptions: 1. Subsidies and International Trade: - In your example, the U.S. government provides a $5 subsidy on each unit of oil exported. This subsidy effectively reduces the cost for U.S. producers to $100 per barrel, making them more competitive in the global market. 2. Domestic Market Pricing: - If U.S. producers want to sell in the domestic market at $105 (including the subsidy), consumers might prefer to import oil from the global market at $100. This situation would lead to consumers choosing the cheaper imported oil over the domestically produced oil. 3. Producer Profit Maximization: - U.S. producers, recognizing the higher price they can fetch in the global market ($105), might prefer to export their entire production rather than selling domestically. This is a rational decision for profit maximization. 4. Global Competition: - Other countries, such as Saudi Arabia, may indeed be willing to export oil at $100. In a competitive global market, consumers will generally choose the lowest-cost option, leading to a preference for the cheaper foreign oil. 5. Impact on Domestic Consumers: - Domestic consumers may indeed end up consuming foreign oil at a lower price, while domestic producers focus on exporting to maximize profits. 6. Government Policy Influence: - The scenario you describe assumes a passive role for the U.S. government, allowing the market forces to determine the outcome. However, governments often have policies and strategies to influence trade, which might include subsidies, tariffs, or other measures. It's important to note that real-world scenarios are complex, and various factors can influence trade dynamics. Government policies, international agreements, transportation costs, quality differences, and geopolitical considerations can all play a role in determining the actual outcomes in global markets. Your analysis is on the right track, but it's also crucial to consider the broader context and the potential influence of various factors on trade and pricing decisions.
bhai kya pyaara samjhaya ye concept
I must thank you for your outstanding explanation and for clarifying the difference between production subsidy and export subsidy at the very beginning.
damn bro your video is brilliant
Thank u!!! The explanation is exhaustive and comprehensible!!
Such a precise explanation, needed help since the text in salvatore was kind of indirect here
Makes sense
Thank you!
However, I do have a question and doubt that domestic consumer price will increase. Because the world price is Pw. If domestic producer sell at Pc (in your graph), then consumers will import from the world at Pw Price. So domestic producer will export all their production to the world market and domestic consumers will import the amount from the world where Pw intersects the demand curve. In an open economy, there is no restriction on Imports and exports. Many other countries will be willing to export the good at Pw price. For example, suppose the oil price in the world market is $100 per barrel. The US government will give a $5 subsidy on each unit of export. So the US oil producer will get $105 for every barrel they export in the world. $100 from the world and $5 from the government. If US domestic oil producer wants to sell at $105 in the domestic market, then foreign oil producers like Saudi Arabia will export to the US at $100. So domestic consumers will consume entirely Saudi oil at $100 and purchase none of the US producer oil. And US producer will export their entire production in the world since they can make $105 per barrel. Please explain if I am wrong and why I am wrong?
Your analysis is insightful, but there are a few nuances to consider in the context of international trade and pricing. Your example highlights the impact of subsidies on exports and how they can affect the competitiveness of domestic producers in the global market. Let's break down the key points and address the potential misconceptions:
1. Subsidies and International Trade:
- In your example, the U.S. government provides a $5 subsidy on each unit of oil exported. This subsidy effectively reduces the cost for U.S. producers to $100 per barrel, making them more competitive in the global market.
2. Domestic Market Pricing:
- If U.S. producers want to sell in the domestic market at $105 (including the subsidy), consumers might prefer to import oil from the global market at $100. This situation would lead to consumers choosing the cheaper imported oil over the domestically produced oil.
3. Producer Profit Maximization:
- U.S. producers, recognizing the higher price they can fetch in the global market ($105), might prefer to export their entire production rather than selling domestically. This is a rational decision for profit maximization.
4. Global Competition:
- Other countries, such as Saudi Arabia, may indeed be willing to export oil at $100. In a competitive global market, consumers will generally choose the lowest-cost option, leading to a preference for the cheaper foreign oil.
5. Impact on Domestic Consumers:
- Domestic consumers may indeed end up consuming foreign oil at a lower price, while domestic producers focus on exporting to maximize profits.
6. Government Policy Influence:
- The scenario you describe assumes a passive role for the U.S. government, allowing the market forces to determine the outcome. However, governments often have policies and strategies to influence trade, which might include subsidies, tariffs, or other measures.
It's important to note that real-world scenarios are complex, and various factors can influence trade dynamics. Government policies, international agreements, transportation costs, quality differences, and geopolitical considerations can all play a role in determining the actual outcomes in global markets.
Your analysis is on the right track, but it's also crucial to consider the broader context and the potential influence of various factors on trade and pricing decisions.
thank you sir
Thank you so much.
what textbook is this diagram from? is it ib approved ?
bro its a theoretical domestic diagram from a small country