A Welfare Comparison between Export Subsidies and Exchange Rate Depreciation

This paper develops a Bertrand price competition model with di erentiated goods in which export subsidies are compared to exchange rate depreciation as di erent government policies for promoting exports. National governments may wish to help domestic rms to expand market shares in pro table areas and might do this through either one of these two tools.Their e ects 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 signi cant di erences according to circumstances. If the exchange rate is su ciently high and the level of the nominal wage su ciently low, the marginal e ect of the subsidy will be higher. But if unions are strong (and demand a high nominal wage) and the exchange rate is su ciently low, the governments could also consider a depreciation as an alternative policy to export subsidies.