International Economics
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Dominick-Salvatore-International-Economics
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Y X X I III A B J* E* T III T I B* E J A* 20 20 40 60 80 100 10 30 50 70 90 110 130 150 170 20 40 60 80 100 FIGURE 4.8. Derivation of Nation 1’s Trade Indifference Map. Trade indifference curve TI is derived from Nation 1’s indifference curve I, as shown in Figure 4.7. Trade indifference curve TIII is similarly derived by sliding Nation 1’s production block along its indifference curve III while keeping the axes always parallel. Higher community indifference curve III gives higher trade indifference curve TIII. For each indifference curve, we could derive the corresponding trade indifference curve and obtain the entire trade indifference map of Nation 1. difference is that now we have derived the top and backward-bending portion of Nation 1’s offer curve as well. As defined earlier, Nation 1’s offer curve shows the amount of imports of commodity Y that Nation 1 demands to be willing to supply various amounts of commodity X for export. Note that the greater Nation 1’s terms of trade are, the higher is the trade indifference curve reached and the greater is Nation 1’s welfare. From Figure 4.9, we can see that as its terms of trade rise from P A = 1 / 4 to P M = 1 1 / 2 , Nation 1 offers more and more exports of commodity X in exchange for more and more imports of commodity Y. At point R, Nation 1 offers the maximum amount of 70X for export. Past point R, Nation 1 will only export less and less of commodity X in exchange for more and more imports of commodity Y. The reason for the backward bend in Nation 1’s offer curve past point R is generally the same as the reason (discussed in Section 4.3b) that gives the offer curve its shape and curvature before the bend. Past point R, the opportunity cost of X has risen so much and the marginal rate of substitution of X for Y has fallen so much that Nation 1 is only willing to offer less and less of X for more and more of Y. The shape of Nation 1’s offer curve can also be explained in terms of the substitution and income effects on Nation 1’s home demand for commodity X. As P X /P Y rises, Nation 1 tends to produce more of commodity X and demand less of it. As a result, Nation 1 has more of commodity X available for export. At the same time, as P X /P Y rises, the income of Nation 1 tends to rise (because it exports commodity X), and when income rises, more of every normal good is demanded in Nation 1, including commodity X. Thus, by itself, the income effect tends to reduce the amount of commodity X available to Nation 1 for export, Salvatore c04.tex V2 - 10/26/2012 12:58 A.M. Page 103 A4.3 Formal Derivation of Nation 1’s Offer Curve 103 Y Y X X TVI H E R S T TV Offer curve TIV TII TIII TI 20 40 60 80 100 120 140 160 –20 20 40 60 70 100 0 P A ' = 4 P F ' = 2 P M =1 P B =1 P F = 1 2 1 2 P A = 1 4 FIGURE 4.9. Formal Derivation of Nation 1’s Offer Curve. Curves TI to TIII are Nation 1’s trade indifference curves, derived from its production block and community indifference curves, as illustrated in Figure 4.8. Lines P A , P F , P B , P M , P F , and P A from the origin refer to relative prices of commodity X at which trade could take place. Joining the origin with tangency points of price lines with trade indifference curves gives Nation 1’s offer curve. This is elastic up to point R , unitary elastic at point R , and inelastic over its backward-bending portion. while the substitution effect tends to increase it. These effects operate simultaneously. Up to P X /P Y = 1 1 / 2 (i.e., up to point R), the substitution effect overwhelms the opposite income effect, and Nation 1 supplies more of commodity X for export. At P X /P Y > 1 1 / 2 , the income effect overwhelms the opposite substitution effect, and Nation 1 supplies less of commodity X for export (i.e., Nation 1’s offer curve bends backward). Note that Nation 1’s offer curve also represents its demand for imports of commodity Y, not in terms of the price of imports (as along a usual demand curve), but in terms of total expenditures in terms of the nation’s exports of commodity X . As Nation 1’s terms of trade Salvatore c04.tex V2 - 10/26/2012 12:58 A.M. Page 104 104 Demand and Supply, Offer Curves, and the Terms of Trade rise (and P Y /P X falls) so that it demands more imported Y, its expenditures in terms of commodity X rise up to point R, reach the maximum at point R, and fall past R. Thus, the nation’s offer curve is elastic up to point R, unitary elastic at point R, and inelastic past point R. We can now understand (at least intuitively) why the nation with the weaker or less intense demand for the other nation’s export commodity has an offer curve with a greater curvature (i.e., less elasticity) and gains more from trade than the nation with the stronger or more intense demand (refer to Problem 5). This is sometimes referred to as the Download 7.1 Mb. Do'stlaringiz bilan baham: |
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