ECON 1269 International Trade

Preparation for Midterm 2

World Price Ratio Straight Line: Knowledge Summary

Black line is the Original World Price Ratio Straight Line ; Blue line is the New World Price Ratio Straight Line.
Nation A: exports good X, and imports good Y. Nation B: imports good X, and exports good Y.
At a World Price Ratio more than 1 (

) :
Good X is now more expensive, causing an Excess Supply of Good X in the world market.
Thus, there is an Deficient Demand of Good X Exported by Nation A.
Hence, Nation A is willing to export less.
Hence, Nation As Export Volume falls.
Good Y is now cheaper, causing an Excess Demand of Good Y in the world market.
Thus, there is an Excess Demand of Good Y Imported by Nation A.
Hence, Nation A is willing to import more.
Hence, Nation As Import Volume rises.
Overall, Nation As Terms of Trade deteriorates.
At a World Price Ratio more than 1 (

) :
Good X is now more expensive, causing an Excess Supply of Good X in the world market.
Thus, there is an Deficient Demand of Good X Imported by Nation B.
Hence, Nation B is willing to import less.
Hence, Nation Bs Import Volume falls.
Good Y is now cheaper, causing an Excess Demand of Good Y in the world market.
Thus, there is an Excess Demand of Good Y Exported by Nation B.
Hence, Nation B is willing to export more.
Hence, Nation Bs Export Volume rises.
Overall, Nation Bs Terms of Trade improves.


Black line is the Original World Price Ratio Straight Line ; Red line is the New World Price Ratio Straight Line.
Nation A: exports good X, and imports good Y. Nation B: imports good X, and exports good Y.
At a World Price Ratio less than 1 (

) :
Good X is now cheaper, causing an Excess Demand of Good X in the world market.
Thus, there is an Excess Demand of Good X Exported by Nation A.
Hence, Nation A is willing to export more.
Hence, Nation As Export Volume rises.
Good Y is now more expensive, causing an Excess Supply of Good Y in the world market.
Thus, there is an Deficient Demand of Good Y Imported by Nation A.
Hence, Nation A is willing to import less.
Hence, Nation As Import Volume falls.
Overall, Nation As Terms of Trade improves.
At a World Price Ratio less than 1 (

) :
Good X is now cheaper, causing an Excess Demand of Good X in the world market.
Thus, there is an Excess Demand of Good X Imported by Nation B.
Hence, Nation B is willing to import more.
Hence, Nation Bs Import Volume rises.
Good Y is now more expensive, causing an Excess Supply of Good Y in the world market.
Thus, there is an Deficient Demand of Good Y Exported by Nation B.
Hence, Nation B is willing to export less.
Hence, Nation Bs Export Volume falls.
Overall, Nation Bs Terms of Trade deteriorates.
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