A Level Economics (9708)•9708/11/M/J/18
Explanation
Export Subsidies with Elastic Demand Boost Export Value but Hurt Price Ratio
Steps:
- Export subsidies lower the domestic currency price of exports, making them cheaper abroad.
- Price-elastic demand means quantity exported rises more than the price falls.
- Total export value (P × Q) increases, improving the balance of trade (exports > imports in value).
- Export price index falls while import prices stay constant, worsening terms of trade (Px / Pm declines).
Why A is correct:
- Standard trade theory: elastic demand ensures revenue gain from volume outweighs price drop, but terms of trade deteriorate as export prices fall relative to imports.
Why the others are wrong:
- B: Terms of trade worsen due to lower export prices, not improve.
- C: Balance of trade improves from higher export revenue, not worsens.
- D: Balance of trade improves, not worsens.
Final answer: A
Topic: Policies to correct imbalances in the current account of the balance of payments
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