Simplified Wealth of Nations by Adam Smith, Book 4, Chapter 5a: Effect of Export Bounties on Real Prices

Chapter 5a: Effect of Export Bounties on Real Prices

1 In Great Britain, export bounties are frequently petitioned for.

2 Bounties should only be given to trades which cannot be carried on without bounties.

3 The trades supported by bounties are the only ones which generate losses in any considerable time. 4 The ingenious and well-informed author of the tracts on the corn-trade has shown very clearly that: 5 The average price of corn has fallen considerably since the bounty's establishment. 6 In years of plenty, the bounty creates an extraordinary exportation. 7 In the actual state of tillage, the bounty undisputably has this tendency.
  1. By opening a more extensive foreign market to the farmer's corn, it increases the demand and production of corn.
  2. By securing a higher price to the farmer, it encourages tillage.
8 I answer that whatever extension of the foreign market the bounty creates must be at the yearly expence of the home market.

Let us suppose that a bounty of 60 pence on the exportation of the quarter* of wheat raises local wheat prices by only 6 pence the bushel, or 48 pence the quarter higher than without the bounty. [6 pence * 8 bushels]

* [1 quarter = 8 bushels]

9 It has been thought that this enhancement of corn's money price must encourage corn production by rendering corn more profitable to the farmer.

10 I answer that this might be the case if the bounty's effect was to raise the real price of corn.


Next: Chapter 5b: The Money Price of Grains Regulates The Money Price of All Commodities