This week's lecture introduces the very important concept of Offer curves. Offer curves are the general equilibrium concept, used often to represent both the exports and imports using one curve. The derivation, interpretation and understading of the comparative statics of offer curves is essential for understanding the advanced concepts that will be introcuced in rest of the international trade part of the unit (until Week 8).
Partial Equilibrium Analysis
The study of individual decision making units (such as a firm or nation) in isloation (i.e., abstracting from all the interconnections that exist between the firm or nation and the rest of the economy of world).
Demand and Supply in both market
As diagram above suggests in the partial equilibrium analysis we only consider the market of one commodity at a time and find out the equilibrium quantity traded at the equilibrium price using the demand and supply of that commodity in the international market. Therefore in this approach we look at only one Market at a time.
Partial Equilibrium Trade Price
Partial equilibrium trade price is determined by demand and supply in the international market, i.e., the excess and demand and supply of both nations joined the trade, untill the excess quantity demand of commodity X= the excess quantity supply of commodity X.(Ref:International Economics, Dominick Salvatore,pp 96-97)(Ref: Week2 Lecture Slides)
General equilibrium theory studies supply and demand in an economy with multiple markets, with the objective of proving that all prices are at equilibrium. The theory analyzes the mechanism by which the choices of economic agents are coordinated across all markets. General equilibrium theory is distinguished from partial equilibrium theory by the fact that it attempts to look at several markets simultaneously rather than a single market in isolation.
Both Market at the same time
As shown in the diagram above the equilibrium-relative commodity price with trade with can be find out using a general equilibrium approach by looking at the intersection of offer curves. A line from the origin to the intersection of offer curves gives the equilibrium trade price and the values of X and Y corresponding to the point of intersection give us the export and import of each nation.
Quantity of Import and Export
The slope of nation's offer curve implies how much of the its commodity the nation demands for it to be willing to supply various amounts of its export commodity. The intersection of the offer curves of the two nations defines the equilibrium relative commodity price at which trade takes place between them. 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. At equilibrium the exports of one nation should be equal to the imports of other nation and vice-versa i.e. in other words the trade should be balanced .
Refer to general equilibrium analysis, it consider all market together, not only the market for one product.
Moreover, general equilibrium analysis considers connection between markets for both goods in the economy. And it can used to examine how a change in demand and supply conditions in one market in one nation would affect the terms of trade, the volume of trade, and the share of the gains from trade in each nation.
General Equilibrium Trade Price
The intersection of the offer curves of the two nations defines the equilibrium relative commodity price at which trade takes place between them.The slope of a line from origin to the point of intersection of offer curves give the relative commodity price at which the trade is balanced.