1) why does the intersection of the offer curves of two nations define the equil
ID: 1132924 • Letter: 1
Question
1) why does the intersection of the offer curves of two nations define the equilibrium commodity price in which trade takes place?2) why does the use of demand and supply curves of the trade commodity refer to partial equilibrium analysis?
3) What does an improvement in a nation’s terms of trade mean? Will this always make a nation better off? 1) why does the intersection of the offer curves of two nations define the equilibrium commodity price in which trade takes place?
2) why does the use of demand and supply curves of the trade commodity refer to partial equilibrium analysis?
3) What does an improvement in a nation’s terms of trade mean? Will this always make a nation better off?
2) why does the use of demand and supply curves of the trade commodity refer to partial equilibrium analysis?
3) What does an improvement in a nation’s terms of trade mean? Will this always make a nation better off?
Explanation / Answer
1).
As we know that a “Offer curve” shows the different possible level of export and imports at different relative prices. Now, in two country world if they engaged in trade they at the equilibrium there will be a common relative price for both the country and the quantity traded between the two country must be same.
So, here if we consider any point other than the intersection point which implied the level of quantity traded will be differ between countries, => the relative price will adjust until the quantity traded will be same. So, here under two country world at the equilibrium there will be a common relative price.
2).
In trade theory under partial equilibrium analysis we just consider the market of single good. SO, under use the demand and supply of that commodity only, where a country will export it and the other country will import it from that country. Now, on the other hand under general equilibrium analysis there will be at least 2 goods, where a country will export a particular good in exchange of other. Similarly the other country will does the same.
3).
First of all the “TOT” refers to the relative price of exportable. So, an increase in the TOT, => the price of exportable increases, => the a country can import more by exporting the same amount of the good.
So, as the TOT increases the country gets more utility compare to the previous situation.
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