International Economics

1. Copyright ©2000, South-Western College Publishing
International Economics
By Robert J. Carbaugh
7th Edition
Chapter 3:
International equilibrium

2. Carbaugh, Chap. 3 2
Indifference curves
 Final pattern of trade depends not just on
supply, but also on demand - which is
determined by individual tastes
 Tastes can be shown graphically with
indifference curves, which show the various
combinations of two goods that give a
consumer the same total level of
satisfaction
Bringing demand into the model

3. Carbaugh, Chap. 3 3
A consumer’s indifference map
0
1
2
3
4
5
6
7
0 1 2 3 4 5 6 7 8 9
Autos
Bringing demand into the model
A
B
C
D
E
I
II
III
Wheat

4. Carbaugh, Chap. 3 4
Indifference curves (cont’d)
 Indifference curves have a negative slope
 Keeping satisfaction constant means giving up
some of one good for more of another
 Indifference curves are convex
 As the consumer gets more of one good, she is
less willing to give up what is left of the other
 The rate of substituting one good for another is
shown by the slope of the curve, the marginal
rate of substitution
Bringing demand into the model

5. Carbaugh, Chap. 3 5
Indifference curves (cont’d)
 “Higher” indifference curves (those farther
from the origin) represent greater levels of
satisfaction
 Individual preferences cannot really be
added up into a “community indifference
curve” but it is useful to imagine that they
can for the purposes of trade theory
Bringing demand into the model

6. Carbaugh, Chap. 3 6
Indifference curves and intl trade
Autos
Bringing demand into the model
F
G
H
E
I
II
III
Domestic
equilibrium
without trade
(autarky)
Wheat

7. Carbaugh, Chap. 3 7
United States
Autos
Basis for trade, gains from trade
Bringing demand into the model
I
A
14
E
2
423
C
II
9
365
323
tUS
B
D
18 24
290
240
tt
Wheat

8. Carbaugh, Chap. 3 8
Equilibrium terms-of-trade limits
International equilibrium
0
0.5
1
1.5
2
2.5
3
0 0.5 1 1.5 2 2.5 3 3.5 4
Autos
A
B
C
Canada price ratio (2:1)
US price ratio (0.5:1)
D E
tt1 (1:1)
Improving Canadian terms of trade
Improving US terms of trade
Wheat

9. Carbaugh, Chap. 3 9
Offer curves: supply and demand
International equilibrium
US Offer Curve
Autos (US exports)
Wheat
(US imports)
A
B
tt1 (1A=0.67W)
60
20
50 90
tt0 (1A=0.4W)
US

10. Carbaugh, Chap. 3 10
Offer curves: supply and demand
International equilibrium
Canadian Offer Curve
Autos (Canadian imports)
A’
B’
tt1’ (1W=0.67A)
60
50
20 60
tt0’ (1W=0.4A)
Canada
Wheat
(Canadianexport)

11. Carbaugh, Chap. 3 11
Equilibrium terms of trade
International equilibrium
Autos (US exports/Canada imports)
A
B
113
100
80 100
Canada
60
150
tt1
tt0
United States
C
Wheat(Canadianexport/USimports)

12. Carbaugh, Chap. 3 12
Changing equilibrium terms of trade
International equilibrium
Autos (US exports/Canada imports)
A
B
160
100
100
Canada1
120
tt1
tt0
United States
Canada0
Wheat(Canadianexport/USimports)

13. Carbaugh, Chap. 3 13
Coffee (export good)
Immiserizing growth
Impact of trade
I
A
B
60 80
50
tt0
C
II
D
tt1
Computers(importgood)