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    Offer Curves & Terms of Trade

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    dranita@yahoo.com
    The document discusses offer curves and terms of trade. An offer curve shows the quantity of imports and exports a country is willing to trade at different terms of trade. It is a combination of import demand and export supply curves. Equilibrium terms of trade are reached when countries' offer curves intersect, indicating the trade volumes both desire. Disequilibrium occurs if terms of trade result in excess supply or demand of goods between countries, putting pressure on prices to reach the equilibrium level.

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    Offer Curves & Terms of Trade

    Uploaded by

    dranita@yahoo.com
    2K views19 pages
    The document discusses offer curves and terms of trade. An offer curve shows the quantity of imports and exports a country is willing to trade at different terms of trade. It is a combination of import demand and export supply curves. Equilibrium terms of trade are reached when countries' offer curves intersect, indicating the trade volumes both desire. Disequilibrium occurs if terms of trade result in excess supply or demand of goods between countries, putting pressure on prices to reach the equilibrium level.

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    This PPT contains the description of Offer Curves and Terms of Trade between two countries.

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    The document discusses offer curves and terms of trade. An offer curve shows the quantity of imports and exports a country is willing to trade at different terms of trade. It is a combination of import demand and export supply curves. Equilibrium terms of trade are reached when countries' offer curves intersect, indicating the trade volumes both desire. Disequilibrium occurs if terms of trade result in excess supply or demand of goods between countries, putting pressure on prices to reach the equilibrium level.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    2K views19 pages

    Offer Curves & Terms of Trade

    Uploaded by

    dranita@yahoo.com
    The document discusses offer curves and terms of trade. An offer curve shows the quantity of imports and exports a country is willing to trade at different terms of trade. It is a combination of import demand and export supply curves. Equilibrium terms of trade are reached when countries' offer curves intersect, indicating the trade volumes both desire. Disequilibrium occurs if terms of trade result in excess supply or demand of goods between countries, putting pressure on prices to reach the equilibrium level.

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    © All Rights Reserved
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    Download as pptx, pdf, or txt
    of 19

    OFFER CURVES

    &

    TERMS OF TRADE

    Derivations of Offer Curve


    Definition: An offer curve of a country

    indicates the quantity of imports and exports


    the country is willing to buy or sell on world
    markets at all possible terms of trade

    Derivations of Offer Curve


    The offer curve can be used to demonstrate

    how equilibrium prices are attained in


    international trade.
    This curve can also be used to explain the
    price and trade volume effects phenomena
    such as economic growth and changes in
    consumer tastes.

    Derivations of Offer Curve


    In fact, an offer curve is a combination of an import

    demand curve and export supply curve.


    The construction of the offer curve is
    completed by connecting all possible points at
    which a country is willing to trade, with
    resulting curve labeled OC1
    http://www.youtube.com/watch?v=imsTtWzgO34

    Y
    Y3
    (PX/PY)1

    Y4

    (PX/PY)2
    Y

    X3
    OCA

    X4

    X
    (PX/PY)2
    (PX/PY)1

    Y6
    Y5
    X5 X6

    7-5

    Deriving Country Bs Offer Curve

    This will reflect Country Bs willingness to trade at

    different terms of trade.


    Bs offer curve bows towards the axis with Bs
    import good on it.

    (PX/PY)1

    Y10
    (PX/PY)2

    Y11
    Y

    X10

    X11 X

    (PX/PY)1
    (PX/PY)2
    OCB

    Y12
    Y9
    X9

    X12

    7-7

    Terms of Trade Equilibrium


    The international terms of trade (that is, P X/PY) will

    be the slope of a line passing through the point


    where the offer curves cross.
    This equilibrium point takes into account demand
    and supply conditions in both countries.

    Terms of Trade Equilibrium


    Y

    OCA

    (PX/PY)E

    OCB
    Y1

    If these are the terms of trade,


    country A will desire to export
    X1 units, and country B will
    want to import X1 units.
    X1

    Terms of Trade Equilibrium


    Y

    OCA

    (PX/PY)E

    OCB
    Y1

    If these are the terms of trade,


    country A will desire to import
    Y1 units, and country B will
    want to export Y1 units.
    X1

    How Do We Know Its Equilibrium?

    Any terms of trade other than (PX/PY)E will result in

    excess demand for one good, and


    excess supply for the other.

    Therefore relative prices will adjust until (P X/PY)E is

    reached.

    Disequilibrium
    Y

    OCA

    (PX/PY)1

    OCB

    Disequilibrium
    Y

    OCA

    (PX/PY)1

    Y1

    OCB

    Y2

    At (PX/PY)1, country A wishes


    to import Y1 units, but country B
    is only interested in exporting Y2
    units. That is, there is an excess
    demand for good Y.
    X

    Disequilibrium
    OCA

    (PX/PY)1

    OCB
    At (PX/PY)1, country A wishes
    to export X1 units, but country B
    is only interested in importing X2
    units. That is, there is an excess
    supply of good X.
    X2

    X1

    Disequilibrium
    Excess demand for Y causes PY to rise.
    Excess supply of X causes PX to fall.
    Thus, (PX/PY) falls.
    In other words, the terms of trade line gets flatter,

    moving the countries in the direction of equilibrium.

    Moving Towards Equilibrium


    Y

    (PX/PY)

    OCA

    OCB

    General Equilibrium Analysis


    The intersection of the two curves defines the
    equilibrium relative commodity price at which trade
    takes place between them.
    Only at this equilibrium prices will trade be
    balanced between the two nations. At any other
    relative commodity price, the desired quantities of
    imports and exports of the two commodities would
    not be equal. This would put pressure on the relative
    commodity price to move toward its equilibrium level.

    General Equilibrium Analysis


    Equilibrium Relative Commodity Price with Trade

    Usefulness of the General


    Equilibrium Model
    General equilibrium model shows the
    conditions of production in the two nations, the
    tastes or demand preference, the autarky point
    of production and equilibrium price in the
    absence of trade, and the comparative
    advantage of each nation. It also shows the
    degree of specialization in production with trade,
    the volume of trade, the terms of trade, the gains
    from trade and the share of these gains going to
    each of the trading nations.

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