The next question to determine is what the terms of trade would be. Clearly the
The actual terms of trade would need to lie somewhere in between these limits. Suppose
The actual terms of trade will depend on overall world and supply conditions, within the limits just mentioned. However, trade will not occur unless the trade is mutually beneficial.
Suppose the terms of trade settle at 1.5 units of steel per unit of wheat. We can graph a trading possibilities curve and relate that curve to the original production possibilities curve.
Figure 5.2: Trading Possibilities Curve
The slope of the trading possibilities curve will be -1.5 for each country. The original production possibilities curve is shifted to the trading possibilities curve by specializing in the production of the good for which each country has a comparative advantage and by then engaging in international trade. As the possible amount of consumption increases for both countries, they will each enjoy a higher standard of living.
Recall that we assume that without trade, the
Note that the above analysis assumes that relative production costs are constant, which allows for straight lines to be used as a production possibilities curve. In reality, as more and more of a good is produced, relative production costs increase because less efficient resources will be used as production increases. As a result, we expect that production possibility curves will be curved lines. Therefore, specialization will not be an all-or-nothing type of situation. Even if the
Domestic producers of goods that are produced relatively cheaply will be able to get higher prices in the world market. Suppose the
Figure 5.3: Effects of International Trade on Domestic Supply and Demand
However, for goods produced relatively inefficiently by the
Figure 5.4: Effects of International Trade on Domestic Supply and Demand
Tariffs and Quotas
InvestingThe Chinese economy is having a significant impact on the performance and profitability of steel and mining stocks.
InvestingThe global steel industry is in deep crisis due to overcapacity, falling prices and rising competition that has threatened the survival of many companies.
InvestingThe steel sector has rebounded quite nicely over the last few months as investors have looked for value. Given the longer term demand picture, the value is still there and more gains could still ...
InsightsThe U.S. said Tuesday it would raise import duties on Chinese cold-rolled steel by 522%.
InvestingRecent price drops present long-term opportunities, while many stable ETFs remain attractive. Learn your best options for turning cold hard steel into cold hard cash.
InvestingWith shares of United States Steel skyrocketing 101% year-to-date, it's safe to say "X" has marked the right spot for many portfolios.
InvestingBuying cyclical stocks at the right time can be a great investment strategy, but it requires more than just trying to time a cycle to benefit.
InvestingU.S. steel producer AK Steel Holding Corporation couldn't escape the negative market sentiment Tuesday.
InvestingDespite a continuous global supply glut, steel prices in China have advanced since the beginning of 2016.
InvestingDespite the 16% one-month plunge in the Market Vectors Steel ETF, names like Steel Dynamics continue to shine.