Chapter 4'

analysis change of American preference on low fat food has little effect on Italian shoes and Dutch tulips Partial equilibrium analysis
The Terms of Trade
Equilibrium-relative commodity price with trade-general equilibrium analysis
Y 60
PB PB ' 1
E’
PA ' 4
40 H’
PF ' 2
N E
PF 1 / 2
20 H
PA 1 / 4
explain
20
improvement (deterioration) of terms of trade The prices the nation receives for its exports rise (fall)
relative to the prices that it pays for importother relative price, the desired quantities of exports and imports would not be equal
Relative price adjusts towards to equilibrium level.
60
X

Why is the offer curve not straight, but bending?
For nation 1(2), it incurs increasing opportunity costs
in producing more of commodity X(Y) (for exports), and The more of Y(X) and the less of X(Y) that nation 1(2) consumes with trade, the more valuable is a unit of X(Y)at the margin compared with a unit of Y(X).
Demand and Supply, Offer Curves, and the Terms of Trade
Learning goals
Show how the equilibrium price at which takes place is determined by demand and supply
The Equilibrium-Relative Commodity Price with Trade-
Partial Equilibrium Analysis
PX / PY
P3
PX / PY
A' '
PX / PY
P3
E*
S
SX
A'
B'
imports
exports
P2 B
P1
SX
E'
E
B*
A
Panel A Nation 1
E.g. suppose at PF 1 / 2 , Nation 1 would like to export 40X ,(at H) . Is it Nation 2’s desired quantities of imports of X Then where is Nation 2’s desired trade point ? (H) so PX / P 1 Y exports of X by nation 1<demanded by nation 2 PX / PY offer curve of Nation 1 moves up
1.5
R
1 1/2 1/4 A

Exports of commodity X
Equilibrium-relative price with partial equilibrium analysis(commodity Y)
PY / PX
Excess supply R’ E H Excess demand of Y 40 60 120 S At A’, the relative price ¼ is just Nation 2’s domestic price, so there is no exports of Y. At the relative price of ½ , and 1.5, there is excess demand and excess supply, respectively. This drives the relative price to rise and fall, respectively, until supply equals demand at E. H’ D
1.5
R
1 1/2 1/4 A’

Exports of commodity Y
General equilibrium versus Partial equilibrium
General equilibrium analysis considers all markets together, not just the market for commodity X or Y. It seeks to explain the behavior of supply, demand and prices in a whole economy with several or many interacting markets, by seeking to prove that a set of prices exists that will result in an overall equilibrium. Partial equilibrium analysis analyzes single market, and allows only a small number of variables to vary; all others are assumed constant. E.g. Price change of oil has big ripple effect General equilibrium
40
60
X
The intersection of the two offer curves defines the equilibrium relative
price at which (E,or E’) takes place between them
At equilibrium price trade will be balanced between two
Autarky price line

Y
offer curve of Nation 2
Y Autarky price line
B'
PA ' 4 P ' 2 F
PB ' 1
60 60Y 60X 40Y 20X
E'
F'
H'
E'
H'
40
PB ' 1 III’
II’ PF ' 2 X 0
A'
20
PM
100
In a world of many traded commodities, it is given by price index of exports( PX ) price index of imports( PM)
100
Commodity or net barter terms of trade
Show how the equilibrium price at which takes
place is determined with offer curves. Explain the meanings of the terms of trade and how they changed over time for the US and other countries.
Definition
In a two-country world, the terms of trade of a nation defined as the ratio of the price of its export commodity to the price of its import commodity. PX
At PF ' 2, Nation 2’s desired import of X is 20, (at H’)
However, Nation 1’s desired export of X is much greater (at the intersection of extended offer curve of nation 1 and ) offer curve of Nation 2 moves down
DX
A*
D
DX
0
X
0
X
Panel B International trade Panel C Nation 2
X
Offer Curves
相互需求
The offer curve(reciprocal demand curve) shows how
much of a nation’s import it demands for it to be willing to supply various amounts of its export commodity. (or alternatively speaking) it shows the nation’s willingness to import and export at various relative commodity prices.