Ie - 04 - 22 - 23
Ie - 04 - 22 - 23
Ie - 04 - 22 - 23
Pilani Campus
Chapter 4
Demand and Supply, Offer Curves, and the
Terms of Trade
Instructor: Prof. Geetilaxmi Mohapatra1
Introduction
Previous Discussion
Difference in relative commodity prices between two
nations in isolation is a reflection of their comparative
advantage and forms the basis for mutually beneficial trade.
At equilibrium relative commodity price, trade is balanced
between both the nations.
• Here we will discuss
• 1) Partial equilibrium analysis
The offer curve for N-2 tells you how much imports of
commodity X, N-2 demands to be wiling to supply various
amount of commodity Y for exports.
N-2 requires higher relative price of Y to be induced to
export more of Y.
There are 2 reasons for it
1) N-2 incurs increasing opportunity cost in producing
more of commodity Y (for export)
2) The more the commodity X and less of commodity Y
that N-2 consumes, with trade, the more valuable to the
nation is a unit of Y at the margin compared with a unit of
X.
1. Trade improvement
An improvement in a nation’s ToT is usually regarded as
beneficial to the nation in the sense that the prices that the
nation receives for its exports rise relative to the prices that
it pays for imports.
2. Trade deterioration
An deterioration in a nation’s ToT is usually regarded as
harmful to the nation in the sense that the prices that the
nation receives for its exports decrease relative to the
prices that it pays for imports.
What happens when one nation’s ToT improves?
BITS Pilani, Pilani Campus
Usefulness of the Model