Offer Curve and Relative commodity with General Equilibrium with Analysis, Slides of Applied Economics

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Central University Of Haryana

Topic: Offer Curve and Relative commodity with General Equilibrium with Analysis Presented By: Ghulam Robani Deptt. of Economics Roll No. 6222

Meaning of Offer Curve

 (^) An offer curve is alternatively called the reciprocal demand curve of a country.  (^) It indicates the quantity of imports and exports that a country is willing to buy and sell on the world market at all possible relative prices.  (^) More specifically, the curve shows the county’s willingness to trade at various possible terms-of- trade.

 (^) Point T corresponds to the volume of trade associated with (PX/PY)1 price ratio. At point T county I exports quantity 0X4 of good X and imports 0Y4 of good Y. The price ratio could also be regarded as the terms-of-trade.  (^) Point T1 corresponds to the volume of trade associated with the (PX/PY)2 price ratio. At point T1 county 1 exports 0X5 of good X and imports 0Y5 of good Y.  (^) (PX/PY)2 in the figure above is represented by a steeper price line and, therefore, a higher relative price ratio. Hence, we expect country II to respond by increasing the quantities of good X that are exported. Similarly, country II’s offer curve can be drawn as follows:

Next, we bring together the two countries offer curves in order to establish the trading equilibrium, as well as the equilibrium terms- of-trade for both countries.

 (^) Trading equilibrium occurs at point E. This is because at point E, the quantity of good X (0XE) that country I wishes to export equals the quantity that country II wishes to import.  (^) In addition, the quantity of good Y that country I wishes to import (0YE) equals the quantity of good Y that country CII wants to export.  (^) The equilibrium terms of trade is denoted by (PX/PY)E or ToTE.