Principles of Macroeconomics / Unit 17 MAC 1617 worked example, 60 to 90 seconds
The Free-Trade Price and Flow
The idea
From two countries' domestic schedules, find each autarky price, then the single free-trade price and the quantity traded. The free-trade price is the one at which one country's excess demand equals the other's excess supply, and that common quantity is the trade flow.
In practice
In the importing country, quantity demanded equals quantity supplied at a price of 60, so 60 is its autarky price. In the exporting country the two are equal at 20, so 20 is its autarky price. Now test 40. In the importer, quantity demanded is 100 and quantity supplied is 40, so excess demand is 60. In the exporter, quantity supplied is 90 and quantity demanded is 30, so excess supply is 60. The two match, so 40 is the free-trade price and 60 units are traded. The importer's price fell from 60 to 40; the exporter's rose from 20 to 40.
Where people slip
Both prices moved, which students often miss by thinking only about the importing country. The exporting country's consumers now pay 40 for a good that cost them 20 before trade, and they are worse off, while its producers are better off. Every trade flow has a losing side in both countries.
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