Exam 7: Offer Curves and the Terms of Trade

(a) Define the theoretical concept of a country's "offer curve" (or "reciprocal demand curve"). Then, using a numerical example, construct three points on a country's offer curve, assuming that the country (call it "country A") exports wheat and imports clothing. (b) Put the offer curve of country A [you do not need to use your specific numbers from part (a) of this question in this part (b)] together with the offer curve of trading partner country B. Explain how the equilibrium position is attained if the countries initially are in a situation that is not a position of equilibrium. (You can assume that the countries are always operating in the "elastic" portions of their offer curves.) (c) Finally, suppose that country B's consumers change their tastes so that they now have greater preference for country A's export good than they did previously. Illustrate and carefully explain the movement from the old equilibrium position to the new equilibrium position because of this change in tastes, assuming other things equal. Be sure to include an indication of the impact on country A's terms of trade and volume of trade.

(a) Define the "offer curve" (or "reciprocal demand curve") of a country. If an offer curve is drawn as an upward-sloping curve, what is being assumed about the value of thecountry's elasticity of demand for imports and why does this assumption yield the upward-sloping curve? (b) Using the usual two-good, two-country offer-curve diagram, identify the equilibrium position and state why the position is one of equilibrium. Then suppose that, from this initial equilibrium position, one country now experiences an increase in productivity in its export industry at the same time that the other country imposes an import tariff. Illustrate and explain the combined or overall impact of these two events on the equilibrium terms of trade and on the quantity traded of each of the two goods. If a combined impact is uncertain, briefly indicate why it is uncertain.

Suppose that country I is importing good Y and exporting good X. At a terms of trade of 1X:4Y, country I is willing to import 60 units of Y and to export 15 units of X in exchange; at a terms of trade of 1X:5Y, country I is willing to import 70 units of Y and to export 14 units of X in exchange. Considering just these two offer curve points, country I's demand for imports between the two points is __________.

In an offer curve graph with country A's exports on the horizontal axis and country B's exports on the vertical axis, which one of the following events will shift or pivot country A's offer curve to the right?

In the following offer curve diagram, At TOT₁, there is excess demand for __________, and the movement to equilibrium will result in better terms of trade for __________.

If country I is trading in the inelastic range of country II's offer curve, then the imposition of a tariff by country I, which still leaves country I in the inelastic range of country II's curve, will (assuming no retaliation) lead to __________ in country I's terms of trade and to __________ in the volume of imports of country I.

"If we observe that a home country's volume and terms of trade are both movingin the same direction (i.e., either both increasing or both decreasing), then we can surmise that the home country's offer curve is shifting. However, if we observe that the home country's volume and terms of trade are moving in opposite directions (i.e., one is increasing and the other is decreasing), then we can surmise that the foreign offer curve is shifting." Is this statement correct or incorrect? Illustrate and explain your answer. (Assume "elastic" offer curves throughout.)

In the following partially-completed table showing country I's demand for import good Y and supply of export good X at various terms of trade, TOT Y demanded supplied 4:1 400 100 3:1 120 2:1 300