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

2. 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

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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

11. 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

12. 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

13. Immiserizing growth B D I II C A tt1 tt0 Impact of trade50
Computers (import good) A
tt0 60 80
Carbaugh, Chap. 3