International Economics Twelfth Edition CHAPTER F O U R 4 International Economics Twelfth Edition Demand and Supply, Offer Curves, and the Terms of Trade RICORDO di portare il libro a lezione Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

Learning Goals: Show how the equilibrium price at which trade takes place is determined. Show how the equilibrium price at which trade takes place is determined with offer curves. Explain the meaning of the terms of trade and how they have changed over time for the United States. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.1 Introduction Relative commodity price differences between two nations in isolation reflect comparative advantage, and forms basis for mutually beneficial trade. Can use partial and general equilibrium analysis to determine equilibrium-relative commodity price at which trade will take place. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.2 The Equilibrium-Relative Commodity Price with Trade-Partial Equilibrium Analysis   Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.2 The Equilibrium-Relative Commodity Price with Trade-Partial Equilibrium Analysis Figure 4-1: At a relative price greater than P1, Nation 1’s excess supply of X (Panel A) gives rise to Nation 1’s international supply curve of X (S in Panel B). At a relative price lower than P3, Nation 2’s excess demand for X (Panel C) gives rise to Nation 2’s demand for imports of X (D in Panel B). Only at P2 (Panel B) does quantity of imports demanded equal quantity of exports supplied. Thus P2 is equilibrium-relative commodity price with trade. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

FIGURE 4-1 The Equilibrium-Relative Commodity Price with Trade with Partial Equilibrium Analysis. A e A’ si riferiscono ai punti della figura 3.3 Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.2 The Equilibrium-Relative Commodity Price with Trade-Partial Equilibrium Analysis Could perform similar analysis for Commodity Y. Changes in domestic supply and demand will shift the import demand and export supply curves and will thus change world prices. Partial equilibrium analysis implies only that the market for a single commodity is in equilibrium, and thus cannot determine the relative price that clears both the markets for X and Y. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.3 Offer Curves (equilibrio generale) Offer curves (sometimes called reciprocal demand curves) allow general equilibrium analysis and the determination of relative prices at which both markets clear. Definizione p.91 A nations offer curve shows how much of its import commodity a nation demands for it to be willing to supply various amounts of its export commodity. Derived from production possibilities frontiers, indifference maps and the various hypothetical relative commodity prices at which trade could take place. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.3 Offer Curves Beginning from the autarky point A, consider changes in the relative price of X. As the relative price of X increases, the nation demands more Y and supplies more X. The difference between the quantity of X supplied and the quantity of X consumed domestically represents the exports of Nation 1 at the new price. The difference between the quantity of Y supplied and the quantity of Y demanded represents the imports of Nation 1 at the new price. This combination of imports and exports is a point on Nation 1’s offer curve, the amount of exports offered in exchange for a specific quantity of imports. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

Prezzo relativo p = px/py Nel grafico 4.3 Se p = ¼, 1 X si scambia con 0,25 Y Se p = 1/2, 1 X si scambia con 0,5 Y Se p = 1, 1 X si scambia con 1 Y Quindi quando p aumenta, lo scambio diventa più vantaggioso per il paese 1 (specializzato in X)

FIGURE 4-3 Derivation of the Offer Curve of Nation 1. NB EC exp, CB imp. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.3 Offer Curves Successive relative price changes yield the shape of the offer curve for Nation 1. Similarly, the offer curve for Nation 2 can be derived. A nation’s offer curve bends towards its import good. Thus Nation 1, which exports X and imports Y, has an offer curve that bends towards the Y axis (is concave to the X axis). Nation 2’s offer curve bends towards the X axis (is concave to the X axis) Changes in supply or demand conditions in the nation will shift the nation’s offer curve. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

Prezzo relativo p = px/py Nel grafico 4.4 Se p = 4, 1 X si scambia con 4 Y Se p = 2, 1 X si scambia con 2 Y Se p = 1, 1 X si scambia con 1 Y Quindi quando p diminuisce lo scambio diventa più vantaggioso per il paese 2 (specializzato in Y)

FIGURE 4-4 Derivation of the Offer Curve of Nation 2 FIGURE 4-4 Derivation of the Offer Curve of Nation 2. NB B’C’ exp; C’E’ imp Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.4 The Equilibrium-Relative Commodity Price with Trade- General Equilibrium Analysis The equilibrium-relative commodity price with trade is found at intersection of the offer curves for two nations. Only at this equilibrium price will trade be balanced. At any other relative commodity price, quantities of imports do not equal quantities of exports, placing pressure on the relative commodity price to move toward equilibrium. Shifts in the offer curves will change the relative price. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

FIGURE 4-5 Equilibrium-Relative Commodity Price with Trade FIGURE 4-5 Equilibrium-Relative Commodity Price with Trade. A p = ½ 1 offre 40; la domanda di 2 la si trova prolungando 0H sino a intersecare il prolungamento della curva di domanda Nation 2. Quindi px aumenta. (v. su mia copia libro) Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.5 Relationship between General and Partial Equilibrium Analyses (NO) Figure 4.6 shows Nation 1’s supply of exports of X (derived from Nation 1’s PPF and indifference curves from Figure 4.3) and Nation 2’s demand for imports of X (derived from Nation 2’s PPF and indifference curves in Figure 4.4). Determines equilibrium-relative commodity price of X. If Nation 2 were small, opening trade would have no impact on the relative price in Nation 1. Trade would occur at Nation 1’s autarky price. Nation 2 would receive all of the gains from trade. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

FIGURE 4-6 Equilibrium-Relative Commodity Price with Partial Equilibrium Analysis.NO Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.5 Relationship between General and Partial Equilibrium Analyses Sì questa slide Both partial equilibrium and general equilibrium analysis use production frontiers and indifference maps to find equilibrium trade price. Only general equilibrium analysis considers all markets together, not just the market for a single commodity. Changes one market affect other markets, which can in turn affect the original market. General equilibrium analysis is therefore required for more complete analysis, although partial equilibrium can give a good first approximation. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

4.7 The Terms of Trade Terms of trade = the ratio of the price of a nation’s export commodity to the price of its import commodity. In a two-nation world, the terms of trade of Nation 1 are equal to the reciprocal of the terms of trade of Nation 2. In a world of many traded goods, the terms of trade is the ratio of the export price index to the import price index, also called commodity or net barter terms of trade. If Nation 1 exports X and imports Y, its terms of trade are given by PX/PY, where P = price index. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

Se per esempio px/py = 100  1X = 1Y Se invece px/py = 120  1X = 1,2Y Le ragioni di scambio del paese che produce X sono migliorate

Case Study 4-1 Demand, Supply, and the International Price of Petroleum Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

Case Study 4-2 The Index of Export to Import Prices for the United States Figure 4.2 Index of Relative U.S. Export Prices, 1972-2014 (2000=100) Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

Case Study 4-3 The Terms of Trade of the G-7 Countries Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

Case Study 4-4 The Terms of Advanced and Developing Countries Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

Appendix to Chapter 4 NO Derivation of a Trade Indifference Curve for Nation 1 Derivation of Nation 1’s Trade Indifference Map Formal Derivation of Nation 1’s Offer Curve Outline of the Formal Derivation of Nation 2’s Offer Curve Multiple and Unstable Equilibria Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

FIGURE 4-7 Derivation of a Trade Indifference Curve for Nation 1. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

FIGURE 4-8 Derivation of Nation 1’s Trade Indifference Map. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

FIGURE 4-9 Formal Derivation of Nation 1’s Offer Curve. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

FIGURE 4-10 Outline of the Formal Derivation of Nation 2’s Offer Curve. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

FIGURE 4-11 Meade’s General Equilibrium Trade Model. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.

FIGURE 4-12 Stable and Unstable Equilibria. Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.