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The Supply and Demand Model for Trade

The Supply and Demand Model for Trade. Two-country model Price-taker model. International Trade . Imagine the situation where NZ and Fiji are willing to trade with one another. ?. International Trade .

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The Supply and Demand Model for Trade

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  1. The Supply and Demand Model for Trade Two-country model Price-taker model

  2. International Trade • Imagine the situation where NZ and Fiji are willing to trade with one another. ?

  3. International Trade • New Zealand is a more efficient producer of beef than Sweden is. (NZ has a comparative advantage in beef) • In the back of your books draw two diagrams 1. One for NZ demand and supply of beef 2. One for Sweden's demand and supply of beef One country will have a lower price……

  4. Markets for Beef – Without Trade Sweden New Zealand Price ($) S S Price ($) Pe Pe D D QA QB Quantity Quantity The price differences between NZ and Sweden represents the differences in efficiency of producers in each country. (NZ has a comparative advantage in Beef so NZ can produce beef cheaper and sell at a lower price)

  5. International Trade for Beef Sweden New Zealand Price ($) Price ($) S S PA PB WP D D QDnz QSs QA QDs Quantity QB QSnz Quantity Import level Export Level

  6. Effects of trade in between NZ and Sweden • Effects to NZ (country with the comparative advantage) • Higher world price has caused the price of beef to rise in NZ • Domestic Consumption has fallen (due to the increase in price) • Domestic Production has risen. • Effects to Sweden (Country with comparable disadvantage in beef production) • Price of beef has fallen • Domestic consumption has increased • Domestic production has decreased

  7. Notes – Supply and Demand models of international trade The S&D model can be used to show trade between countries. • Large trading nations AND • Smaller ‘price taker’ nations. • Three assumptions of the model • No transport costs • Only two countries trade this good • The prices on each axis are for the same currency

  8. Price Taker’s (Small countries) • NZ is a price taker • A price taker must accept or take the price that is set in the world market. • Whether a good is imported or exported depends on where the World price is, in relation to the Domestic product. • World price= the price at which a good or service is traded on international markets • Domestic Price= The price at which a good or service is traded on home market.

  9. For trade to occur… • When there is a difference between the two equilibrium prices, there is potential for trade. • Trade will occur between the two equilibrium prices for each country. • The World Price will be the point where imports equal exports (not necessarily half way between).

  10. International Trade for Beef Sweden New Zealand Price ($) Price ($) S S PA PB WP D D QDnz QSs QA QDs Quantity QB QSnz Quantity Import level Export Level

  11. Changes in World Price • If a large country’s (in terms of output of the good) demand or supply curve shifts, this will cause a change in World Price. • For the World Price to decrease: • The exporting country’s supply would increase or the demand would decrease. • The importing country’s supply would decrease or the demand would increase. • For the World Price to increase: • The exporting country’s supply would decrease or the demand would increase. • The importing country’s supply would increase or the demand would decrease.

  12. Demand is affected by • Income • Tastes and preference • Price of related goods • Supply is affected by • Costs of production • Technology • Price of other goods the producer could make

  13. Changes in the World Price • ‘Price-taker’ countries are unable to influence the World Price as they are too small in terms of their output for that good. • If the World Price increases: • For an exporting country the quantity exported will increase due to an increase in the price (less is consumed by New Zealanders, more is produced domestically). • For an importing country the quantity imported will decrease due to an increase in the price (less is consumed by New Zealanders, more is produced domestically). • The opposite of these two scenarios will occur if the world price decreases.

  14. Two country ModelWhere trading countries are able to influence the world price of a commodity COUNTRY A COUNTRY B 35 30 25 20 15 10 5 35 30 25 20 15 10 5 QA QB X M The world price is influenced by the supply of exports to and the demand of exports from the world market. This model is not accurate for price taker countries like NZ.

  15. Importing country (Price taker) Exporting country (Price Taker) One-country model (price takers)- Page 74 workbookWhere trading countries are unable to influence world price of a commodity S S Pe WP Pe WP D D Qs Qe Qd Qd Qe QS M X

  16. One Country Model- Price TakerInfluences on the quantities of imported and exported • Market Strawberries (Imports) • Changes in domestic demand and supply will affect our level of imports and exports. • Changes in the demand and supply of large trading partners will only affect our levels of imports and exports if they are able to influence world price • Factors beyond NZ control have caused the world price to rise. • This leads to a fall in quantity imported • Increase in quantity domestically produced and consumed. S Pe WP’ WP Qs Qe Qd M

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