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.
• On a scrap piece of paper 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
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
Two country Model
• This model is used where the trading
countries are both able to influence the
world price of the commodity
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).
Two country Model
Where trading countries are able to influence the world price of a
commodity
COUNTRY A
PA
COUNTRY B
35
35
30
30
25
25
20
20
15
PB
15
10
10
5
5
5 10 15 20 25 30 40 45
QA
Quantity (000s)
5 10 15 20 25 30 40 45
QB
Quantity (000s)
The world price is influenced by the supply of exports to and the demand of exports from
the world market.
Two Country Model
• Before Trade
– Country A was producing QA (20 000) at a price of PA
($25)
– Country B was producing QB (25 000) at a price of PB
($15)
If trade was allowed to occur, Country As consumers
would prefer to buy good from Country B as they are
cheaper.
And Country B producers would prefer to sell to the
higher paying Country A.
Country A will import and Country B will export
Two country Model
Where trading countries are able to influence the world price of a
commodity
COUNTRY A
PA
COUNTRY B
35
35
30
30
25
25
20
20
15
PB
15
10
10
5
5
5 10 15 20 25 30 40 45
QS QA QD
Local
Quantity (000s)
production
Imports
5 10 15 20 25 30 40 45
QD QB QS
Local
Quantity (000s)
Exports
consumption
The world price is influenced by the supply of exports to and the demand of exports from
the world market.
Two Country Model
• After Trade at the world price of ($20)
– Country A production falls from QA to QS
(15 000) and demand increases from QA to QD
(25 000)
– Country A will import the difference between
QS and QD (10 000)
– Country B production increases from QB to QS
(30 000) and demand falls from QB to QD (20
000)
– Country B will export the difference between
QS and QD (10 000)
Two Country Model
• The world price is not always halfway
between the existing prices.
• It is where the quantity exported from
country B equals the quantity imported to
A
Workbooks page 87-89
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.
Demand is affected by
• Income
• Tastes and preference
• Price of related goods
• Supply is affected by
– Costs of production
– Technology
– Price of other goods the producer could make
One Country
Price Taker Model
• 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.
Price Taker
• A price taker is a country that is unable to
influence the world price of a commodity.
• NZ is a price taker because our output is
so small in comparison to the rest of the
world a change in domestic demand or
supply will have no effect on the world
price.
Example Milk Production
• How many liters of milk does NZ produce?
• In 2012 - 19.1 billion litres of milk
World Dairy Milk Production
3%
NZ Production
World Production
97%
New Zealand produces only
a very small share of the
world’s milk.
Most milk is consumed in
the country of production –
NZ is an exception where
this is reversed.
Page 21
Confidential to Fonterra Co-operative Group
Exports
• An export is a product consumed in one
country and sold to and consumed in
another country.
• Reasons for exports occurring
• The World price is higher than the domestic price
would be if there was no trade
• The World provides a larger market than the
domestic market.
• When these reasons occur, trade results in larger
revenues for firms than if trade didn’t occur.
New Zealand as a exporter
Exports
World
Demand
curve
World Price
QD
NZ
QS
NZ
Imports
• An import is a product consumed by one country
but produced in another country
• Reasons why imports occur
• The world price is lower than what the domestic
price would be than if there was no trade
• The importing country may not have the resources
to produce the imported product.
• Imports enable the standard of living of a nation to
be greater than it would otherwise be.
New Zealand as an Importer
World supply
curve
World
Price
QDnz
QSnz
Imports
Workbooks Page 72- 74
One Country Model- Price Taker
Influences on the quantities of imported and exported
• Changes in domestic demand and
supply will affect our level of imports
Market Strawberries (Imports)
and exports.
S
• Changes in the demand and supply of
large trading partners will only affect
our levels of imports and exports if
WP’
they are able to influence world price
Pe
WP
• Factors beyond NZ control have
caused the world price to rise.
Qs
Qe
M
Qd
• This leads to a fall in quantity
imported
• Increase in quantity domestically
produced and consumed.
Price Taker Model – Changes in Demand
• A change in domestic demand, has no effect on the
world price as NZ is a price taker.
E.G. NZ Incomes fall
A Fall in incomes by
Nzlanders cause a
decrease in domestic
demand for imports. This
is shown by the demand
curve shifting to the left.
DNZ
QDNZ
Imports
Causing a fall in the
amount of imports.