Comparative_Advantage__Lesson_11_

Comparative_Advantage__Lesson_11_ - World Equilibrium In...

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1 Lesson 11 1 World Equilibrium In this lesson, we put two countries together to model a world-wide market for goods. We show how equilibrium prices are determined in the world market and how changes within each country can affect the equilibrium. Lesson 11 2 Assume there are two countries, two goods: H X Q H Y Q 500 100 100 25 Home Country Foreign Country F X Q F Y Q Lesson 11 3 The supply curves for each of the two countries: H X Q Y X P P Y X P P 5 1 4 H X S F X S F X Q Home Country Foreign Country 500 25
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2 Lesson 11 4 Add demand to determine equilibrium: H X Q Y X P P Y X P P 5 1 4 H X S F X S F X Q Home Country Foreign Country 500 25 H X D F X D Lesson 11 5 Derive world supply by horizontal addition: F X H X Q Q + Y X P P 5 1 F X H X S S + 500 525 4 Lesson 11 6 Derive world demand by horizontal addition: F X H X Q Q + Y X P P F X H X D D + 50 250 5 1 200 F X D H X D
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3 Lesson 11 7 The world (“free trade”) equilibrium : F X H X Q Q + Y X P P 5 1 F X H X D D + 500 525 4 F X H X S
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Comparative_Advantage__Lesson_11_ - World Equilibrium In...

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