1. The Supply and Demand Model for Trade
Two-country model
Price-taker model

2. International Trade
Imagine the situation where NZ and Fiji are willing to trade with one another. ?

3. International Trade
New Zealand is a more efficient producer of beef than Sweden is. (NZ has a comparative advantage in beef)
In the back of your books draw two diagrams
1. One for NZ demand and supply of beef
2. One for Sweden's demand and supply of beef
One country will have a lower price……

4. Markets for Beef – Without Trade
Sweden New Zealand
Price ($) S S
Price ($) Pe Pe D D QA QB
Quantity
Quantity
The price differences between NZ and Sweden represents the differences in efficiency of producers in each country. (NZ has a comparative advantage in Beef so NZ can produce beef cheaper and sell at a lower price)

5. International Trade for Beef
Sweden New Zealand
Price ($)
Price ($) S S PA PB WP D D
QDnz
QSs QA
QDs
Quantity QB
QSnz
Quantity
Import level
Export Level

6. Effects of trade in between NZ and Sweden
Effects to NZ (country with the comparative advantage)
Higher world price has caused the price of beef to rise in NZ
Domestic Consumption has fallen (due to the increase in price)
Domestic Production has risen.
Effects to Sweden (Country with comparable disadvantage in beef production)
Price of beef has fallen
Domestic consumption has increased
Domestic production has decreased

7. Notes – Supply and Demand models of international trade
The S&D model can be used to show trade between countries.
Large trading nations AND
Smaller ‘price taker’ nations.
Three assumptions of the model
No transport costs
Only two countries trade this good
The prices on each axis are for the same currency

8. Price Taker’s (Small countries)
NZ is a price taker
A price taker must accept or take the price that is set in the world market.
Whether a good is imported or exported depends on where the World price is, in relation to the Domestic product.
World price= the price at which a good or service is traded on international markets
Domestic Price= The price at which a good or service is traded on home market.

9. For trade to occur…
When there is a difference between the two equilibrium prices, there is potential for trade.
Trade will occur between the two equilibrium prices for each country.
The World Price will be the point where imports equal exports (not necessarily half way between).

10. International Trade for Beef
Sweden New Zealand
Price ($)
Price ($) S S PA PB WP D D
QDnz
QSs QA
QDs
Quantity QB
QSnz
Quantity
Import level
Export Level

11. Changes in World Price
If a large country’s (in terms of output of the good) demand or supply curve shifts, this will cause a change in World Price.
For the World Price to decrease:
The exporting country’s supply would increase or the demand would decrease.
The importing country’s supply would decrease or the demand would increase.
For the World Price to increase:
The exporting country’s supply would decrease or the demand would increase.
The importing country’s supply would increase or the demand would decrease.

12. Changes in the World Price
‘Price-taker’ countries are unable to influence the World Price as they are too small in terms of their output for that good.
If the World Price increases:
For an exporting country the quantity exported will increase due to an increase in the price (less is consumed by New Zealanders, more is produced domestically).
For an importing country the quantity imported will decrease due to an increase in the price (less is consumed by New Zealanders, more is produced domestically).
The opposite of these two scenarios will occur if the world price decreases.

13. Example… COUNTRY A COUNTRY B 35 30 25 20 15 10 5 35 30 25 20 15 10 5 XQA QB X M

14. One-country model (price takers)
Importing country
Exporting country S S Pe WP Pe WP D D Qs Qe Qd Qd Qe QS M X