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Derivation of the offer curve, 1

 Charles van Marrewijk. Y. p x /p y 2. 0. X. Derivation of the offer curve, 1. Take an economy with the ppf as shown in the figure. If its preferences are as indicated, then we know.

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Derivation of the offer curve, 1

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  1.  Charles van Marrewijk Y px/py 2 0 X Derivation of the offer curve, 1 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 is given by px/py 2 the economy does not want to trade at the world market

  2.  Charles van Marrewijk Y px/py 1 0 X Derivation of the offer curve, 2 On the other hand, if that same economy is confronted 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 in exchange for imp1 of good Y C1 imp1 pr1 exp1

  3.  Charles van Marrewijk Y px/py 0 0 X Derivation of the offer curve, 3 Similarly, if that same economy is confronted with prices px/py 0 then we can derive that it wants to produce at pr0, consume at C0 and trade C0 imp0 (offer) exp0 of good X in exchange for imp0 of good Y We can repeat this procedure for all prices px/py pr0 exp0

  4.  Charles van Marrewijk px/py 0 Y px/py 1 px/py 2 X Derivation of the offer curve, 4 We can plot the price px/py as a line through the origin in (X,Y)-space At px/py 2 the economy does not want to trade At px/py 0 the economy offers exp0 in exchange for imp0 At px/py 1 the economy offers exp1 in exchange for imp1 imp0 imp1 Connecting such trade gives the offer curve exp1 exp0

  5.  Charles van Marrewijk A B Derivation of the offer curve, 5 country A: demand for Y country B: supply of Y Y 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 country B: demand for X This determines the equilibrium px/py

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