Principles of Microeconomics / Unit 16 MIC 1511 worked example, 60 to 90 seconds
Two Countries, One Good
The idea
Each country has its own demand and supply for the good and its own no-trade price. When trade opens, traders buy where the price is low and sell where it is high until one price clears both markets. At that price the exporter's excess supply equals the importer's excess demand, and that quantity is the trade flow. Find the two no-trade prices, then search prices between them for the one where the excess quantities match.
In practice
Worked example, steel by the ton. Home demands one hundred twenty at four hundred dollars, one hundred ten at five hundred, one hundred at six hundred, ninety at seven hundred and eighty at eight hundred, and supplies forty, fifty, sixty, seventy and eighty at those prices: no-trade price eight hundred. Foreign demands sixty at three hundred, fifty at four hundred, forty at five hundred and thirty at six hundred, and supplies forty, fifty, sixty and seventy: no-trade price four hundred. At six hundred, Home wants one hundred and makes sixty, forty short; Foreign makes seventy and wants thirty, forty over. The world price is six hundred and forty tons cross the border.
Where people slip
The world price lies between the two no-trade prices, never outside; if the excess quantities do not match, move the price toward the country whose gap is larger. And the exporter's price rose while the importer's fell; the next video starts there.
Your place on the trail
Every lesson rests on earlier ones and opens later ones. Tap any to jump.
Something wrong in this lesson? Flag it