International Economics By Robert J. Carbaugh 9th 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 income & 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 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 int’l. trade Bringing demand into the model Indifference curves and int’l. trade Carbaugh, Chap. 3

Basis for trade, gains from trade Bringing demand into the model Basis for trade, gains from trade Carbaugh, Chap. 3

Equilibrium terms-of-trade limits International equilibrium Equilibrium terms-of-trade limits Carbaugh, Chap. 3

Theory of Reciprocal Demand (Mill) International equilibrium Theory of Reciprocal Demand (Mill) Actual trading prices depend on the interaction of trading partners’ demands Final terms of trade will be closer to the domestic price ratio of the nation with stronger demand for the imported good Applies to nations of equal economic size, which will share gains nearly equally Small nations trading with large ones can receive the bulk of the gains from trade Carbaugh, Chap. 3

Offer curves: supply and demand International equilibrium Offer curves: supply and demand Carbaugh, Chap. 3

Offer curves: supply and demand International equilibrium Offer curves: supply and demand Carbaugh, Chap. 3

Equilibrium terms of trade International equilibrium Equilibrium terms of trade Carbaugh, Chap. 3

Changing equilibrium terms of trade International equilibrium Changing equilibrium terms of trade Carbaugh, Chap. 3

Impact of trade Immiserizing growth Carbaugh, Chap. 3