A Welfare Comparison Between Export Subsidies and Exchange Rate Depreciation

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.