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Unformatted text preview: Chapter 07 – Offer Curves and the Terms of Trade CHAPTER 7 OFFER CURVES AND THE TERMS OF TRADE Learning Objectives: ■ To understand a country’s offer curve and how it is obtained. ■ To learn how the equilibrium international terms of trade are attained. ■ To identify and determine how changes in both supply and demand conditions influence a country’s international terms of trade and volume of trade. ■ To appreciate the usefulness of different concepts of the terms of trade. I. Outline Introduction- Terms-of-Trade Shocks A Country’s Offer Curve Trading Equilibrium Shifts of Offer Curves Elasticity and the Offer Curve Other Concepts of the Terms of Trade- Income Terms of Trade- Single Factoral Terms of Trade- Double Factoral Terms of Trade Summary Appendix A: Derivation of Import-Demand Elasticity on an Offer Curve Appendix B: Elasticity and Instability of Offer Curve Equilibria II. Special Chapter Features Concept Box 1: The Tabular Approach to Deriving an Offer Curve Concept Box 2: Measurement of the Terms of Trade In the Real World: Terms of Trade for Major Groups of Countries, 1972-2005 In the Real World: Income Terms of Trade of Major Groups of Countries, 1972-2005 III. Purpose of Chapter The purpose of this chapter is to introduce students to the concept of the offer curve and to the determination of the equilibrium international terms of trade. A general overview of the chapter is that, until this point in the book, the establishment of the equilibrium terms of trade has not been analyzed: now the student can see how the terms of trade result from the interaction of supply and demand in the world market. 7-1 Chapter 07 – Offer Curves and the Terms of Trade IV. Teaching Tips A. Offer curves are often viewed by students as difficult and theoretical. The introduction to this chapter presents the impact of changes in the supply of exports or demand for imports on terms of trade for a group of African nations. The impact of these changes in terms of trade on real income is also presented. This is designed to provide additional motivation for the students to understand how terms of trade are determined and why they change. B. The offer curve and the terms of trade are used extensively in later chapters, so the foundation established in this chapter is very important. We find it useful to stress that, unlike other concepts to which the students have been exposed, the offer curve is both a supply curve (of exports) and a demand curve (for imports). C. The “tabular approach” to deriving an offer curve developed in Concept Box 1 seems to be interesting to students. It is also useful because it drives home the point about the offer curve being both a supply curve and a demand curve. In addition, adding another row or two to the table with appropriately-chosen numbers can yield a “backward-bending” offer curve that is understandable....
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This note was uploaded on 11/27/2009 for the course ECON 421 taught by Professor Macphee,c during the Spring '08 term at UNL.
- Spring '08