Chap10 Inter-regional Trade Two Region Trade Model Assumptions Excess demand and supply relationships Graphical Analysis Algebraic Representations Extensions.

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Presentation transcript:

Chap10 Inter-regional Trade Two Region Trade Model Assumptions Excess demand and supply relationships Graphical Analysis Algebraic Representations Extensions transportation costs taxes, subsidies

Prices vary over space trade from surplus to deficit markets/regions US corn belt vs Eastern markets Wheat, pulses, canola – Western Canada Transport services – link markets - value-adding activity - resources - marketing margin Other Costs: Inspection, certification, customs clearances, taxes, tariffs

Principles: Inter-regional trade & price differentials Assuming: competitive marketsHomogeneous product Sufficient information (no asymmetries) No trade barriers Regions trade – surplus to deficit region price differential = cost of transfer Requires absolute (comparative) advantage ≥ transfer cost Long-Run + Competitive forces (arbitrage) Regions do not trade price differential ≤ transfer cost

Three Market Model Deficit Market Market Price = $110 $15 Surplus Market 2 Market Price = $95 $15 Surplus Market 1 Market Price = $100 $10

Spatial Dimensions of Markets Two Fundamental factors – price relationships 1comparative (competitive) advantage relative resource endowments technology scale economies 2transportation (transfer) costs

Inter-regional Trade Model Assumptions Two regions One good (homogeneous) Competitive markets No barriers to trade (quota, taxes) Market equilibrium with no trade (autarky) with trade & transfer cost = 0 with trade & transfer cost > 0

Excess Demand & Supply Framework Incentive for interregional trade –price difference => arbitrage Excess Demand higher price market ED = D - S Excess Supply lower price market ES = S - D Demand & Supply factors Preferences, income, population Factor endowments, technology, EOS

Excess Demand P Region 1 High Price Q Excess Demand

Excess Supply Region 2 low price Excess Supply P Q

Inter-regional Equilibrium No Transport Costs Region 2 low price Region 1 High Price QImports Exports

Inter-regional Equilibrium With Transport = $3/unit Region 2 low price Region 1 High Price QImports Exports

Inter-regional Trade Analytical Model Market A: Direct Demand & Supply Indirect Demand & Supply

Autarky Equilibrium Market A: Equilibrium Condition

Inter-regional Trade Market B: Direct Demand & Supply Indirect Demand & Supply

Autarky Equilibrium Market B: Equilibrium Condition

Trade Equilibrium Excess Demand & Supply Functions Excess Demand (A) Excess Supply (B)

Inter-regional Equilibrium Equilibrium Condition

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