Carbaugh, International Economics 9e, Chapter 3
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Transcript Carbaugh, International Economics 9e, Chapter 3
International Economics
By Robert J. Carbaugh
9th Edition
Chapter 3:
International Equilibrium
Copyright ©2004, South-Western College Publishing
Bringing demand into the model
Indifference curves
Final pattern of trade depends not just on
supply, but also on demand - which is
determined by income & 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
Carbaugh, Chap. 3
2
Bringing demand into the model
A consumer’s indifference map
Carbaugh, Chap. 3
3
Bringing demand into the model
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
Carbaugh, Chap. 3
4
Bringing demand into the model
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
Carbaugh, Chap. 3
5
Bringing demand into the model
Indifference curves and int’l. trade
Carbaugh, Chap. 3
6
Bringing demand into the model
Basis for trade, gains from trade
Carbaugh, Chap. 3
7
International equilibrium
Equilibrium terms-of-trade limits
Carbaugh, Chap. 3
8
International equilibrium
Theory of Reciprocal Demand (Mill)
Actual trading prices depend on the
interaction of trading partners’ demands
Final terms of trade will be closer to the
domestic price ratio of the nation with
stronger demand for the imported good
Applies to nations of equal economic size,
which will share gains nearly equally
Small nations trading with large ones can
receive the bulk of the gains from trade
Carbaugh, Chap. 3
9
International equilibrium
Offer curves: supply and demand
Carbaugh, Chap. 3
10
International equilibrium
Offer curves: supply and demand
Carbaugh, Chap. 3
11
International equilibrium
Equilibrium terms of trade
Carbaugh, Chap. 3
12
International equilibrium
Changing equilibrium terms of trade
Carbaugh, Chap. 3
13
Impact of trade
Immiserizing growth
Carbaugh, Chap. 3
14