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A stable ratio of exchange will be fixed at the point

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Unformatted text preview: assumed a given amount of labor in each country and considered differing output of the two goods due to differing labor efficiency. According to Mill’s Doctrine of Reciprocal Demand, the actual ratio at which goods exchange between the two countries will depend on a reciprocal demand. Reciprocal demand means the relative strength and elasticity of demand of two trading countries for each other’s product in terms of their own product. A stable ratio of exchange will be fixed at the point at which the value of imports and exports of each country is in equilibrium. Offer Curves How the Terms of Trade Are Established Offer Curves are Offer all combinations of a country’s desired exports and imports at different terms of trade also known as reciprocal demand curves (J.S. Mills) measures of willingness to trade Offer Curves Offer Offer curves represent willingness to trade at every possible terms of trade As the relative price of good X rises, Country A becomes willing to export more and import more Offer curves “bow” towards the import good axis Terms of Trade Equilibrium Terms The international terms of trade (that is, PX/PY) will be the slope of a line passing through the point where the offer curves cross. This equilibrium point takes into...
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