International Economics By Robert J. Carbaugh 7th Edition Chapter 3: International equilibrium

Bringing demand into the model Indifference curves Final pattern of trade depends not just on supply, but also on demand - which is determined by individual tastes Tastes can be shown graphically with indifference curves, which show the various combinations of two goods that give a consumer the same total level of satisfaction Carbaugh, Chap. 3

A consumer’s indifference map Bringing demand into the model A consumer’s indifference map A III Wheat B C II D E I Carbaugh, Chap. 3

Indifference curves (cont’d) Bringing demand into the model Indifference curves (cont’d) Indifference curves have a negative slope Keeping satisfaction constant means giving up some of one good for more of another Indifference curves are convex As the consumer gets more of one good, she is less willing to give up what is left of the other The rate of substituting one good for another is shown by the slope of the curve, the marginal rate of substitution Carbaugh, Chap. 3

Indifference curves (cont’d) Bringing demand into the model Indifference curves (cont’d) “Higher” indifference curves (those farther from the origin) represent greater levels of satisfaction Individual preferences cannot really be added up into a “community indifference curve” but it is useful to imagine that they can for the purposes of trade theory Carbaugh, Chap. 3

Indifference curves and intl trade Bringing demand into the model Indifference curves and intl trade F G E III Wheat Domestic equilibrium without trade (autarky) II H I Carbaugh, Chap. 3

Basis for trade, gains from trade Bringing demand into the model Basis for trade, gains from trade C II 9 365 B D 18 24 290 240 tt E 2 423 323 A I tUS Wheat 14 Carbaugh, Chap. 3

Equilibrium terms-of-trade limits International equilibrium Equilibrium terms-of-trade limits Canada price ratio (2:1) Improving US terms of trade C tt1 (1:1) Improving Canadian terms of trade Wheat E D A US price ratio (0.5:1) B Carbaugh, Chap. 3

Offer curves: supply and demand International equilibrium Offer curves: supply and demand US tt1 (1A=0.67W) B 60 tt0 (1A=0.4W) 20 A 50 90 Carbaugh, Chap. 3

Offer curves: supply and demand International equilibrium Offer curves: supply and demand tt0’ (1W=0.4A) Canada 60 B’ (Canadian export) Wheat A’ 50 tt1’ (1W=0.67A) 20 60 Carbaugh, Chap. 3

Equilibrium terms of trade International equilibrium Equilibrium terms of trade United States tt0 tt1 B 113 Canada 100 A Wheat (Canadian export/US imports) 60 C 80 100 150 Carbaugh, Chap. 3

Changing equilibrium terms of trade International equilibrium Changing equilibrium terms of trade United States tt1 Canada1 160 tt0 B Canada0 100 A Wheat (Canadian export/US imports) 100 120 Carbaugh, Chap. 3

Immiserizing growth B D I II C A tt1 tt0 Impact of trade 50 Computers (import good) A tt0 60 80 Carbaugh, Chap. 3