(a) Define the concept of a country's (call it country A's) offer curve. Will this curve always be upward-sloping? Briefly, why or why not?
(b) Put country A's offer curve together with the offer curve of a trading partner country (call it country B) and indicate the equilibrium position. Then suppose that, from this equilibrium position, country A's consumers now change their tastes toward wanting relatively more of A's export good at the same time that country B reduces its tariff on A's export good. Explain the impact of each event separately on the volume of trade of each good and on the terms of trade. Then indicate whether it is possible to assess, when the new equilibrium position is attained, the net results of the two shifts together on the volume of trade of each good and on the terms of trade (in comparison with the initial equilibrium). (Assume that the offer curves are "elastic" throughout.)

Question

Quizplus · Accepted Answer

The Answer is (a) The concept of a country's offer curve refers to the relationship between the price of a country's export good and the quantity of that good that the country is willing and able to export. This curve shows the various combinations of price and quantity that the country is willing to export at, given its production capacity and the prices of its import goods. The offer curve will not always be upward-sloping, as it depends on the elasticity of supply and demand for the export good. If the supply of the export good is relatively elastic (responsive to price changes), the offer curve may be upward-sloping. However, if the supply is relatively inelastic, the offer curve may be horizontal or even downward-sloping.

(b) When country A's offer curve is put together with country B's offer curve, the equilibrium position is determined by the point where the two offer curves intersect. This point represents the quantity of trade that will occur between the two countries at a certain price.

If country A's consumers change their tastes toward wanting relatively more of A's export good, this will shift country A's offer curve outward, leading to an increase in the volume of trade of the export good and a decrease in the volume of trade of the import good. This will also lead to an improvement in the terms of trade for country A.

If country B reduces its tariff on A's export good, this will also shift country A's offer curve outward, leading to an increase in the volume of trade of the export good and a decrease in the volume of trade of the import good. This will also lead to an improvement in the terms of trade for country A.

When the new equilibrium position is attained, it is possible to assess the net results of the two shifts together on the volume of trade of each good and on the terms of trade. The volume of trade of the export good will increase, while the volume of trade of the import good will decrease. The terms of trade will also improve for country A, as the price of its export good will increase relative to the price of its import good.

(A) Define the Concept of a Country's (Call It Country