1. Derivation of the offer curve, 1
 Charles van Marrewijk
Derivation of the offer curve, 1
Take an economy with the ppf as shown in the figure X Y
If its preferences are as indicated, then we know
That if the international relative price is given by px/py 2 the economy does not want to trade at the world market
px/py 2

2. Derivation of the offer curve, 2
 Charles van Marrewijk
Derivation of the offer curve, 2 X Y
On the other hand, if that same economy is confronted
px/py 1
with prices px/py 1 then we can derive that it wants
to produce at pr1, consume at C1 and trade (offer) exp1 of good X in exchange for imp1 of good Y C1
imp1
pr1
exp1

3. Derivation of the offer curve, 3
 Charles van Marrewijk
Derivation of the offer curve, 3 X Y
px/py 0
Similarly, if that same economy is confronted with prices px/py 0 then we can derive that it wants to produce at pr0, consume at C0 and trade C0
imp0
(offer) exp0 of good X in exchange for imp0 of good Y
We can repeat this procedure for all prices px/py
pr0
exp0

4. Derivation of the offer curve, 4
 Charles van Marrewijk
Derivation of the offer curve, 4
px/py 0
We can plot the price px/py as a line through the origin in (X,Y)-space X Y
px/py 1
At px/py 2 the economy does not want to trade
At px/py 0 the economy offers exp0 in exchange for imp0
At px/py 1 the economy offers exp1 in exchange for imp1
imp0
px/py 2
imp1
Connecting such trade gives the
offer curve
exp1
exp0

5. Derivation of the offer curve, 5
 Charles van Marrewijk
Derivation of the offer curve, 5
country A: demand for Y
country B: supply of Y A Y B
If we have 2 countries, A and B, and follow a similar procedure for both we can derive 2 offer curves
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 X
country A: supply of X
country B: demand for X
This determines the equilibrium px/py