AGEC 652 – Lecture 6
COMPARATIVE ADVANTAGE - OFFER CURVES
A difference in relative autarky commodity prices between two countries
is a reflection of their comparative advantage and forms the basis for
mutually beneficial trade.
Offer curves are a more rigorous, theoretical yet intuitive method of
determining the equilibrium relative commodity price with trade
Definition: the locus of supplies available for export of one commodity
and quantities desired for import of another commodity at various
relative price levels for the two commodities.
Alternatively: the offer curve shows how much of one commodity a
nation desires to import to be willing to export various amounts
of another commodity in return.
NATION A – OFFER CURVE
Y
Y
P2
y4-y0
E
y4
H
y3
y2
P0
A
y1
E’
P1
F
G
y0
B
C
P1
H’
y3-y1
P0
P2
C’
G’
0
X3
X0 X1 X2
X4
X
0
X4-X2
X3-X1
Price
ESX
EDy
Pt. on O.C.
P0
0
0
0
P1
F – G = (X3-X1)
H – G = (y3-y1)
H’
P2
B – C = (X4-X2)
E – C = (y4-y0)
E’
X
NATION B – OFFER CURVE
Y
P’1
P’2
Y
P’0
D
F’
D-L
J’
I-K
I
F
L
B
U2
J
K
B
B
U1
X
0
F-L
J-K
Price
ESy
EDX
Pt. on O.C.
P’0
0
0
0
P’1
I-K
J-K
J’
P’2
D-L
F-L
F’
X
WORLD PRICE AND TRADE EQUILIBRIUM
P’1
P’0
A
Y
F’
L’
E’
K’
p2 = p’2
B
J’
p1
H’
p0
G’
C’
0
X
1. Equilibrium Price at P’2 = P2
2. World Trade
Nation A exports 0C’ of X to Nation B
Nation B exports 0L’ of Y to Nation A
3. Why are offer curves bowed outward?
EXCESS SUPPLY AND DEMAND CURVES
P (=P /P )
P’0
x
y
Nation A
Nation B
Nation A
Nation B
ES AX
EDBX
ES AX
EDBX
100
150
P’1
P2=P’2
P1
P0
P’0
World
Market
for
Good X
P’1
P2 = P’2
P1
P0
50
200
250
Qx
FORMAL GEOMETRIC DERIVATION OF OFFER CURVE – Nation A
Y
W
B
Z
A
C
Y0
XC0
Commodity
X
A’
Consumption
Production
C
Trade (=Prod-Cons)
X
X
C
0
X0
0
Y
Y
C
0
Y
C
0
0
FORMAL GEOMETRIC DERIVATION OF OFFER CURVE (cont’d)
Y
W
B
Z
A
C
Y1
●
Y 1t
Commodity
X C1
A’
Consumption
Production
t
t
B’ (X 1 ,Y 1 )
X 1t
t
X
X
C
1
X
Y
Y
C
1
Y 1 - Y1
X
Trade (=Prod-Cons)
t
C
1
+ X1
X1
C
t
- Y 1t
FORMAL GEOMETRIC DERIVATION OF OFFER CURVE (cont’d)
TI0
W
Y
B
Z
W’
A
B’
A’
X
Z’
1. A whole family of Trade Indifference curves can be derived for each country
2. Note: The slope of the TI curves are equal to those of the U curves at corresponding points
FORMAL GEOMETRIC DERIVATION OF OFFER CURVE (cont’d)
Y
P6
Nation A
Offer Curve
P5
P4
P3
P2
TI6
TI5
P1
TI4
TI3
TI2
TI1
P0
0
X
TWO COUNTRY GENERAL EQUILIBRIUM TRADE MODEL
Nations A and B
Y
A
U0
PA
PA = PB
Nation A
OCA
OCB
PB
0
X
Nation B
U
B
0