1. International Economics By Robert J. Carbaugh 9th 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 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

3. A consumer’s indifference map
Bringing demand into the model
A consumer’s indifference map
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 int’l. trade
Bringing demand into the model
Indifference curves and int’l. trade
Carbaugh, Chap. 3

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

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

9. 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

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

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

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

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

14. Impact of trade
Immiserizing growth
Carbaugh, Chap. 3