A Level Economics (9708)•9708/13/O/N/21
Explanation
Export Subsidies with Elastic Demand Boost Export Value but Lower Export Prices
Steps:
- Export subsidies reduce the world price of exports to increase competitiveness.
- Price-elastic demand means quantity exported rises more than the price falls.
- Export revenue (value) therefore increases due to elasticity >1.
- Balance of trade improves from higher export value; terms of trade worsen as export prices fall relative to import prices.
Why A is correct:
- With elastic demand, revenue rises when price falls (elasticity definition: %ΔQ > %ΔP), improving balance of trade, while terms of trade = export price index / import price index decreases from lower export prices.
Why the others are wrong:
- B: Terms of trade decrease, not increase, due to subsidized lower export prices.
- C: Balance of trade increases, not decreases, from higher export revenue.
- D: Both effects are wrong; balance improves and terms worsen.
Final answer: A
Topic: Policies to correct imbalances in the current account of the balance of payments
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