Determinants of Trade
AG BM 102
Introduction
• Trade - an integral part of food system
• Major market for our products – corn,
cotton, soybeans, chicken
• Major source of products for our diet –
bananas, coffee, cocoa, vegetables,
spices
• Issues to be examined
– Demand and supply of traded products
– Exchange rates and trade policy
Key concept - excess demand
Excess demand is the amount by which
quantity demanded exceeds quantity
supplied at a particular price
An example – beef demand
Price/lb
Price/lb
$5.00
Quantity
lbs/cap
50
$3.75
Quantity
lbs/cap
75
$4.75
55
$3.50
80
$4.50
60
$3.25
85
$4.25
65
$3.00
90
$4.00
70
$2.75
95
An example – beef supply
Price/lb
Price/lb
Quantity
lbs/cap
$3.00
Quantity
lbs/cap
60
$4.25
72.5
$3.25
62.5
$4.50
75
$3.50
65
$4.75
77.5
$3.75
67.5
$5.00
80
$4.00
70
$5.25
82.5
Excess beef demand
Price
Q Demand Q Supply
E Demand
$5.00
$4.75
$4.50
$4.25
$4.00
$3.75
$3.50
$3.25
$3.00
50
55
60
65
70
75
80
85
90
-30
-22.5
-15
-7.5
0
7.5
15
22.5
30
80
77.5
75
72.5
70
67.5
65
62.5
60
Some points about excess demand
• Much more elastic than regular demand
since it reflects simultaneous changes in
domestic supply and demand
• Excess demand defines the demand curve
for imports by a country
Excess supply
• Opposite of excess demand
• Excess Supply = Quantity Supplied –
Quantity Demanded
Notes on excess supply
• Much more elastic than regular supply
since reflects changes in both domestic
supply and demand
• Defines the potential supply of exports by
a country
Excess supply of Mexican beef
Quantity
Price Dollars
30
$4.00
Price Pesos
10 pesos/$1
40
22.5
$3.75
37.5
15
$3.50
35
7.5
$3.25
32.5
0
$3.00
30
Beef Market
$5.00
ESMexico
$4.00
P*
EDUS
$3.00
$2.00
$1.00
$0.00
0
7.5
15
Qtrade
22.5
30
37.5
45
Notes about trade
• At $3.50, amount that US is short (in
deficit) is exactly the amount that rest of
world (Mexico) is long (willing to supply)
• No coincidence, based on excess demand
for US and excess supply for ROW
• With trade - price is lower in the United
States than without trade for what we
import
Exports
• When our price is lower than the world
price, we will export – corn
• This removes corn from our market –
raises our price
• It puts U.S. corn in other markets – lowers
their price
Exchange Rates
• Suppose the Dollar rises in value compared to
Peso, $1 buys more Pesos – it bought 10
before, now it buys 20
• This means that something priced at 40 pesos
costs a U.S. buyer less than before when paid
for in dollars
• Take the case where $1 now buys 20 Pesos
• Mexican beef priced at 40 pesos now costs
$2.00 per pound, not $4.00
• Everything we buy from Mexico is now on sale
Excess supply of Mexican beef
Quantity
Price
Pesos
30
Price
Dollars
10/1
$4.00
40
Price
Dollars
20/1
$2.00
22.5
$3.75
37.5
$1.875
15
$3.50
35
$1.75
7.5
$3.25
32.5
$1.625
0
$3.00
30
$1.50
Beef Market
Cheap Peso
$5.00
ESMexico
$4.00
P*
EDUS
$3.00
P**
$2.00
ESMexico'
$1.00
$0.00
0
7.5
15
22.5
Qtrade
30
37.5
45
52.5
Q**trade
60
More on exchange rates
• If Peso falls in value (dollar rises in value =
strong dollar) everything we buy from
Mexico costs less and everything Mexico
buys from us costs more
• If Peso rises in value (dollar falls in value –
weak dollar) everything we buy from
Mexico costs more and everything Mexico
buys from us costs less
More on exchange rates
• Strong dollar shifts supply curve for U.S. imports
down (to the right) and rotates the curve
clockwise
• Weak dollar shifts the supply curve for U.S.
imports up (to the left) and rotates the curve
counterclockwise
• Strong dollar shifts supply curve for U.S. exports
up (to the left) and rotates the curve
counterclockwise
• Weak dollar shifts supply for U.S. exports down
(to the right) and rotates the curve clockwise
Yugoslavian Banknote
Conclusions
• Excess supply and demand curves are the
basis for determining the volume of trade
• The position and shape of the curves are
affected by currency values (exchange
rates) in addition to all the factors that
affect the underlying domestic and foreign
supply and demand curves