Equilibrium anytermsoftradeotherthanpxpyewill

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Unformatted text preview: account demand and supply conditions in both countries Terms of Trade Equilibrium Terms Y OCA (PX/PY)E OCB Y1 X1 X Terms of Trade Equilibrium Terms Y OCA (PX/PY)E OCB Y1 If these are the terms of trade, country A will desire to export X1 units, and country B will want to import X1 units X1 X Terms of Trade Equilibrium Terms Y OCA (PX/PY)E OCB Y1 If these are the terms of trade, country A will desire to import Y1 units, and country B will want to export Y1 units X1 X How Do We Know It’s Equilibrium? Equilibrium? Any terms of trade other than (PX/PY)E will result in • • excess demand for one good excess supply for the other Therefore relative prices will adjust until (PX/PY)E is reached Disequilibrium Disequilibrium Y OCA (PX/PY)1 OCB X Disequilibrium Disequilibrium Y OCA (PX/PY)1 Y1 OCB Y2 X Disequilibrium Disequilibrium Y OCA (PX/PY)1 Y1 OCB Y2 At (PX/PY)1, country A wishes to import Y1 units, but country B is only interested in exporting Y2 units. That is, there is an excess demand for go...
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This document was uploaded on 11/08/2013.

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