Offer Curves
• Offer curves (sometimes called reciprocal demand
curves) introduced to international economics by
Marshall and Edgeworth.
• Shows how much of its import commodity a nation
demands for it to be willing to supply various
amounts of its export commodity.
• Can be derived from production possibilities
frontier, indifference map and various hypothetical
relative commodity prices at which trade could
take place.
Derivation of the offer curve
Y Take an economy with the ppf as shown in the figure
If its preferences are as indicated, then we know
That if the international relative price
px/py 2 is given by px/py 2 the economy does
not want to trade at the world market
0 X
Derivation of the offer curve
Y
On the other hand, if that same economy is confronted
px/py 1 with prices px/py 1 then we can derive that it wants
to produce at pr1, consume at C1
and trade (offer) exp1 of good X
C1 in exchange for imp1 of good Y
imp1
exp1 pr1
0 X
Derivation of the offer curve
Y px/py 0 Similarly, if that same
economy is confronted
C0 with prices px/py 0 then
imp0 we can derive that it
wants to produce at pr0,
consume at C0 and trade
(offer) exp0 of good
X in exchange for We can repeat this
imp0 of good Y procedure for all
exp0 pr0 prices px/py
0 X
Derivation of the offer curve
px/py 0 We can plot the
price px/py as a
Y
px/py 1 line through the
At px/py 2 the economy origin in (X,Y)-
does not want to trade space
At px/py 1 the At px/py 0 the
economy offers exp1 economy offers exp0
in exchange for imp1 in exchange for imp0
imp0 px/py 2
imp1
Connecting such trade
gives the offer curve
exp1 exp0 X
Derivation of the offer curve
country A: demand for Y
country B: supply of Y A
Y B
If we have 2 countries, A
and B, and follow a similar
procedure for both we can
derive 2 offer curves
The point of intersection is
an international equilibrium:
the supply of X by A equals
the demand of X by B and
vice versa for good Y
X
country A: supply of X
This determines the equilibrium px/py country B: demand for X
FIGURE 4-3 Derivation of the Offer Curve of Nation 1.
FIGURE 4-4 Derivation of the Offer Curve of Nation 2.
The Equilibrium-Relative Commodity Price with
Trade-General Equilibrium Analysis
• Equilibrium-relative commodity price with trade
found at intersection of offer curves for two nations.
• Only at this equilibrium price will trade be balanced.
• At any other relative commodity price, quantities of
imports do not equal quantities of exports, placing
pressure on relative commodity price to move
toward equilibrium.
FIGURE 4-5 Equilibrium-Relative Commodity Price with Trade.
Relationship between General and Partial
Equilibrium Analyses
• Both partial equilibrium and general equilibrium
analysis use production frontiers and indifference
maps to find equilibrium trade price.
• Only general equilibrium analysis considers all
markets together, not just the market for commodity
X.
• Changes in the market for X affect other markets,
which possibly impact the market for X.
• General equilibrium analysis is therefore required for
more complete analysis.
FIGURE 4-6 Equilibrium-Relative Commodity Price with Partial Equilibrium Analysis.
The Terms of Trade
• Terms of trade = the ratio of the price of a nation’s
export commodity to the price of its import
commodity.
– In a two-nation world, the terms of trade of Nation 1 are
equal to the reciprocal of the terms of trade of Nation 2.
– In a world of many traded goods, the terms of trade is the
ratio of the export price index to the import price index,
also called commodity or net barter terms of trade.
• If Nation 1 exports X and imports Y, its terms of trade are given
by PX/PY, where P = price index.
