INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 1 Derivation of the offer curve X Y 0 p x /p y 2 Take an economy with the ppf as shown in the figure If its preferences are as indicated, then we know That if the international relative price is given by p x /p y 2 the economy does not want to trade at the world market

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 2 Derivation of the offer curve X Y 0 On the other hand, if that same economy is confronted with prices p x /p y 1 then we can derive that it wants to produce at pr 1, consume at C 1 and trade (offer) exp 1 of good X in exchange for imp 1 of good Y p x /p y 1 pr 1 C1C1 exp 1 imp 1

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 3 Similarly, if that same economy is confronted with prices p x /p y 0 then we can derive that it wants to produce at pr 0, consume at C 0 and trade (offer) exp 0 of good X in exchange for imp 0 of good Y pr 0 C0C0 exp 0 imp 0 p x /p y 0 We can repeat this procedure for all prices p x /p y Derivation of the offer curve X Y 0

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 4 p x /p y 2 We can plot the price p x /p y as a line through the origin in (X,Y)- space p x /p y 1 p x /p y 0 exp 1 exp 0 imp 1 imp 0 X Y At p x /p y 1 the economy offers exp 1 in exchange for imp 1 At p x /p y 2 the economy does not want to trade At p x /p y 0 the economy offers exp 0 in exchange for imp 0 Connecting such trade gives the offer curve Derivation of the offer curve

INTERNATIONAL ECONOMICS: THEORY, APPLICATION, AND POLICY;  Charles van Marrewijk, 2006; 5 If we have 2 countries, A and B, and follow a similar procedure for both we can derive 2 offer curves A B country A: supply of X country B: demand for X X Y country A: demand for Y country B: supply of Y The point of intersection is an international equilibrium: the supply of X by A equals the demand of X by B and vice versa for good Y This determines the equilibrium p x /p y Derivation of the offer curve