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Jul 17, 2023 · To depict a free trade equilibrium using an export supply and import demand diagram, we must redraw the export supply curve in light of the small country assumption. The assumption implies that the export supply curve is horizontal at the level of the world price.
International Trade Equilibrium “Free-trade equilibrium”: when the relative price of wheat/cloth is the same in the two countries We need to solve for: • the relative price of wheat/cloth at equilibrium • production and consumption in Home and Foreign 3 Patterns of International Trade
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Free trade equilibrium (I): Effi cient international specialization • Previous supply-side assumptions are all we need to make qualitative predictions about pattern of trade. • (Let p z) denote the price of good z in both countries, under free trade. • Profit-maximization requires:
Free-Trade Equilibrium Pattern of Trade • Home exports computers, the good that uses intensively the factor of production (K) found in relative abundance at Home. • Foreign exports shoes, the good that uses intensively the factor of production (L) found in relative abundance there. This result is called the Heckscher-Ohlin theorem.
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Characterization of free trade equilibrium boils down to finding (zz, ω) using effi cient international specialization and trade balance. Problem is that this approach does not easily extend to economies with more than two countries. In the two-country case, each country specializes in the goods in which it has a CA compared to the other country
Learning Objectives. Use supply and demand to derive import demand curves and export supply curves. Combine import demand and export supply curves to depict a free trade equilibrium under the assumption that the countries are large.
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Dec 2, 2017 · For a very small home country, the free-trade equilibrium may be characterized by a relative price that equals Foreign’s opportunity costs (p 1 /p 2 = a L1 * /a L2 *). As shown by Fig. 4.4, the wage ratio takes on its upper bound and all the gains from trade accrue to the home country.
