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The Supply and Demand Model for Trade -Two-country model -Price-taker model

The Supply and Demand Model for Trade

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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 . - PowerPoint PPT Presentation

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Page 1: The Supply and Demand Model for Trade

The Supply and Demand Model for Trade-Two-country model-Price-taker model

Page 2: The Supply and Demand Model for Trade

International Trade

• Imagine the situation where NZ and Fiji are willing to trade with one another.

?

Page 3: The Supply and Demand Model for Trade

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……

Page 4: The Supply and Demand Model for Trade

Markets for Beef – Without Trade

Pe

Sweden New Zealand

QA QB

Price ($)

Price ($)

Quantity Quantity

Pe

S

S

D D

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)

Page 5: The Supply and Demand Model for Trade

International Trade for Beef

WP

PA

PB

Sweden New Zealand

QA QB

Price ($) Price ($)

Quantity Quantity

SS

D D

QSs QDs

Import level

QDnz QSnz

Export Level

Page 6: The Supply and Demand Model for Trade

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

Page 7: The Supply and Demand Model for 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 model1. No transport costs2. Only two countries trade this good3. The prices on each axis are for the same

currency

Notes – Supply and Demand models of international trade

Page 8: The Supply and Demand Model for Trade

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.

Page 9: The Supply and Demand Model for Trade

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).

Page 10: The Supply and Demand Model for Trade

International Trade for Beef

WP

PA

PB

Sweden New Zealand

QA QB

Price ($) Price ($)

Quantity Quantity

SS

D D

QSs QDs

Import level

QDnz QSnz

Export Level

Page 11: The Supply and Demand Model for Trade

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.

Page 12: The Supply and Demand Model for Trade

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

Page 13: The Supply and Demand Model for Trade

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.

Page 14: The Supply and Demand Model for Trade

Two country ModelWhere trading countries are able to influence the world price of a

commodity

M X

COUNTRY A COUNTRY B

QA QB

35

30

25

20

15

10

5

35

30

25

20

15

10

5

The world price is influenced by the supply of exports to and the demand of exports from the world market. This model is not accurate for price taker countries like NZ.

Page 15: The Supply and Demand Model for Trade

One-country model (price takers)- Page 74 workbook

Where trading countries are unable to influence world price of a commodity

• Importing country (Price taker) • Exporting country (Price Taker)

Pe

Qe

WP

D

S

Pe

Qe

WP

D

S

MX

QSQd

Qs Qd

Page 16: The Supply and Demand Model for Trade

One Country Model- Price TakerInfluences on the quantities of imported and exported

• Market Strawberries (Imports)• Changes in domestic demand and

supply will affect our level of imports and exports.

• Changes in the demand and supply of large trading partners will only affect our levels of imports and exports if they are able to influence world price

• Factors beyond NZ control have caused the world price to rise.

• This leads to a fall in quantity imported

• Increase in quantity domestically produced and consumed.

Pe

Qe

S

M

Qs Qd

WP

WP’