Transcript The Supply and Demand Model for Trade

The Supply and Demand
Model for Trade
-Two-country model
-Price-taker model
International Trade
• Imagine the situation where NZ and Fiji
are willing to trade with one another.
?
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……
Markets for Beef – Without Trade
Sweden
S
Price ($)
New Zealand
S
Price ($)
Pe
Pe
D
QA
Quantity
D
QB
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)
International Trade for Beef
Sweden
New Zealand
Price ($)
S
Price ($)
S
PA
WP
PB
D
QSs QA QDs
Import level
Quantity
D
QDnz QB QSnz
Export Level
Quantity
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
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
1. No transport costs
2. Only two countries trade this good
3. The prices on each axis are for the same
currency
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.
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).
International Trade for Beef
Sweden
New Zealand
Price ($)
S
Price ($)
S
PA
WP
PB
D
QSs QA QDs
Import level
Quantity
D
QDnz QB QSnz
Export Level
Quantity
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.
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.
Example…
COUNTRY A
COUNTRY B
35
35
30
30
25
25
20
20
15
15
10
10
5
5
QA
M
QB
X
One-country model (price takers)
• Importing country
• Exporting country
S
S
WP
Pe
Pe
WP
D
D
Qs
Qe
Qd
Qd
M
Qe
X
QS