4 Salvatore Cap. 4 SC

CHAPTER F O U R
4 International
Economics
Twelfth Edition
Demand and Supply, Offer Curves,

and the Terms of Trade
RICORDO di portare il libro a lezione
Salvatore: International Economics, 12th Edition © 2016 John Wiley & Sons, Inc.
Learning Goals:
 Show how the equilibrium price at which

trade takes place is determined.
 Show how the equilibrium price at which
trade takes place is determined with offer
curves.
 Explain the meaning of the terms of trade and
how they have changed over time for the
United States.
4.1 Introduction
 Relative commodity price differences

between two nations in isolation reflect
comparative advantage, and forms basis for
mutually beneficial trade.
 Can use partial and general equilibrium
analysis to determine equilibrium-relative
commodity price at which trade will take
place.
4.2 The Equilibrium-Relative Commodity
Price with Trade-Partial Equilibrium Analysis
 Figure 4-1:
 At a relative price greater than P1, Nation 1’s excess
supply of X (Panel A) gives rise to Nation 1’s
international supply curve of X (S in Panel B).
 At a relative price lower than P3, Nation 2’s excess
demand for X (Panel C) gives rise to Nation 2’s
demand for imports of X (D in Panel B).
 Only at P2 (Panel B) does quantity of imports
demanded equal quantity of exports supplied.
 Thus P2 is equilibrium-relative commodity price
with trade.
FIGURE 4-1 The Equilibrium-Relative Commodity Price with Trade
with Partial Equilibrium Analysis. A e A’ si riferiscono ai punti della
figura 3.3
 Could perform similar analysis for Commodity Y.
 Changes in domestic supply and demand will shift

the import demand and export supply curves and
will thus change world prices.
 Partial equilibrium analysis implies only that the

market for a single commodity is in equilibrium,
and thus cannot determine the relative price that
clears both the markets for X and Y.
4.3 Offer Curves (equilibrio generale)
 Offer curves (sometimes called reciprocal demand

curves) allow general equilibrium analysis and the
determination of relative prices at which both markets
clear. Definizione p.91
 A nations offer curve shows how much of its import
commodity a nation demands for it to be willing to
supply various amounts of its export commodity.
 Derived from production possibilities frontiers,
indifference maps and the various hypothetical relative
commodity prices at which trade could take place.
4.3 Offer Curves
 Beginning from the autarky point A, consider changes in

the relative price of X.
 As the relative price of X increases, the nation demands
more Y and supplies more X.
 The difference between the quantity of X supplied and the
quantity of X consumed domestically represents the exports
of Nation 1 at the new price.
 The difference between the quantity of Y supplied and the
quantity of Y demanded represents the imports of Nation 1 at
the new price.
 This combination of imports and exports is a point on Nation
1’s offer curve, the amount of exports offered in exchange for
a specific quantity of imports.
Prezzo relativo p = px/py
 Nel grafico 4.3
 Se p = ¼, 1 X si scambia con 0,25 Y
 Se p = 1/2, 1 X si scambia con 0,5 Y
 Se p = 1, 1 X si scambia con 1 Y
 Quindi quando p aumenta, lo scambio
diventa più vantaggioso per il paese 1
(specializzato in X)
FIGURE 4-3 Derivation of the Offer Curve of Nation 1.
NB EC exp, CB imp.
4.3 Offer Curves
 Successive relative price changes yield the shape of the

offer curve for Nation 1.
 Similarly, the offer curve for Nation 2 can be derived.
 A nation’s offer curve bends towards its import good.
 Thus Nation 1, which exports X and imports Y, has an offer
curve that bends towards the Y axis (is concave to the X axis).
 Nation 2’s offer curve bends towards the X axis (is concave to
the X axis)
 Changes in supply or demand conditions in the nation will
shift the nation’s offer curve.
Prezzo relativo p = px/py
 Nel grafico 4.4
 Quindi quando p diminuisce lo scambio
diventa più vantaggioso per il paese 2
(specializzato in Y)
FIGURE 4-4 Derivation of the Offer Curve of Nation 2. NB B’C’
exp; C’E’ imp
Price with Trade- General Equilibrium
Analysis
 The equilibrium-relative commodity price with
trade is found at intersection of the offer curves for
two nations.
 Only at this equilibrium price will trade be balanced.
 At any other relative commodity price, quantities of
imports do not equal quantities of exports, placing
pressure on the relative commodity price to move
toward equilibrium.
 Shifts in the offer curves will change the relative price.
FIGURE 4-5 Equilibrium-Relative Commodity Price with Trade. A p = ½ 1 offre
40; la domanda di 2 la si trova prolungando 0H sino a intersecare il prolungamento
della curva di domanda Nation 2. Quindi px aumenta. (v. su mia copia libro)
4.5 Relationship between General and
Partial Equilibrium Analyses (NO)
 Figure 4.6 shows Nation 1’s supply of exports of X
(derived from Nation 1’s PPF and indifference curves
from Figure 4.3) and Nation 2’s demand for imports
of X (derived from Nation 2’s PPF and indifference
curves in Figure 4.4).
 Determines equilibrium-relative commodity price of X.
 If Nation 2 were small, opening trade would have no
impact on the relative price in Nation 1.
 Trade would occur at Nation 1’s autarky price.
 Nation 2 would receive all of the gains from trade.
FIGURE 4-6 Equilibrium-Relative Commodity Price with Partial
Equilibrium Analysis.NO
4.5 Relationship between General and Partial
Equilibrium Analyses Sì questa slide
 Both partial equilibrium and general equilibrium

analysis use production frontiers and indifference
maps to find equilibrium trade price.
 Only general equilibrium analysis considers all
markets together, not just the market for a single
commodity.
 Changes one market affect other markets, which
can in turn affect the original market.
 General equilibrium analysis is therefore required
for more complete analysis, although partial
equilibrium can give a good first approximation.
4.7 The Terms of Trade
 Terms of trade = the ratio of the price of a

nation’s export commodity to the price of its
import commodity.
 In a two-nation world, the terms of trade of Nation 1
are equal to the reciprocal of the terms of trade of
Nation 2.
 In a world of many traded goods, the terms of trade is
the ratio of the export price index to the import price
index, also called commodity or net barter terms of
trade.
 If Nation 1 exports X and imports Y, its terms of trade are
given by PX/PY, where P = price index.
 Se per esempio px/py = 100  1X = 1Y
 Se invece px/py = 120  1X = 1,2Y
 Le ragioni di scambio del paese che produce
X sono migliorate
Case Study 4-1 Demand, Supply, and the
International Price of Petroleum
Case Study 4-2 The Index of Export to Import
Prices for the United States
Figure 4.2 Index of Relative U.S. Export Prices, 1972-2014

(2000=100)
Case Study 4-3 The Terms of Trade of the G-7
Countries
Case Study 4-4 The Terms of Advanced and
Developing Countries
Appendix to Chapter 4 NO
 Derivation of a Trade Indifference Curve for

Nation 1
 Derivation of Nation 1’s Trade Indifference Map
 Formal Derivation of Nation 1’s Offer Curve
 Outline of the Formal Derivation of Nation 2’s
Offer Curve
 Multiple and Unstable Equilibria
FIGURE 4-7 Derivation of a Trade Indifference Curve for Nation 1.
FIGURE 4-8 Derivation of Nation 1’s Trade Indifference Map.
FIGURE 4-9 Formal Derivation of Nation 1’s Offer Curve.
FIGURE 4-10 Outline of the Formal Derivation of Nation 2’s
Offer Curve.
FIGURE 4-11 Meade’s General Equilibrium Trade Model.
FIGURE 4-12 Stable and Unstable Equilibria.

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CHAPTER F O U R

Demand and Supply, Offer Curves,

 Show how the equilibrium price at which

 Relative commodity price differences

 Could perform similar analysis for Commodity Y.

 Changes in domestic supply and demand will shift

 Partial equilibrium analysis implies only that the

 Offer curves (sometimes called reciprocal demand

 Beginning from the autarky point A, consider changes in

 Successive relative price changes yield the shape of the

 Both partial equilibrium and general equilibrium

 Terms of trade = the ratio of the price of a

Figure 4.2 Index of Relative U.S. Export Prices, 1972-2014

 Derivation of a Trade Indifference Curve for

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