(4)
c1
αI
Pl
(5)
c2
βi
P 2
(b) The Marshallian Demands with the Presence of Export Credits
In contrast, if the consumer in the importing country receives secondary benefits
from an export credit program, his/her budget constraint is likely to be affected due to the
cost saving on the import payment. From above discussion, this study presumes that the
consumer views his/her cost saving on the import payment as being discounted. Thus,
his/her budget constraint can be formulated as:
(6) P1fC1f-d(P1fC1f)+P2fC2f=If
⇒P1f(1-d)C1f+P2fC2f=If
Note that ‘d’ refers to the fixed discount rate discussed above14. The range of the subsidy
element is assumed to take on the value of 0 ≤ d < 1 . If d = 0 , this implies that there is
no discount on the import payments; thus, the budget constraint formulated in equation
(6) is just the same as the budget constraint in equation (3b). If d = 1 , then there is a full
discount such as for aid relief, which implies that consumption of good 1 is not an
optimization choice for the consumer in the importing country. Thus, this study assumes
that d < 1 .
By applying a similar utility maximization procedure, , the Marshallian demands
of goods 1 and 2 can be obtained as:
14 See Rienstra-Munnicha (2004) for more detailed formulation of this budget constraint.
17