Supply and Demand Geometry for International Trade

Supply and Demand Geometry for International Trade: The world beer market

    The trade market depicts the direct interaction between importing and exporting countries. The supply and demand curves specific to the trade market are:
        Dm = the demand for imports by the buying country, and
        Sx = the supply of exports by the selling country.
This handout illustrates how these two curves are linked to the domestic markets of two trading countries.
    For example, consider the possibility of U.S. and German trade in beer. Each country has a domestic autarky (no trade) equilibrium based on its own supply and demand conditions. If the world price is above the country's autarky price (Pa), the country would like to export beer. If the world price is below the country's autarky price, the country would like to import beer. Specifically:
        For any price > Pa, Qx = Qs - Qd (where Qx = quantity supplied of exports).
        For any price < Pa: Qm = Qd - Qs (where Qm = quantity demanded of imports).
Use these relationships and the domestic-market supply and demand curves below to finish completing the table:

U.S.					********	Germany (')
			Trade						Trade
P	Qd	Qs	Direction	Quantity		P	Qd	Qs	Direction	Quantity
7.00	8	11	X	Qx = 3		7.00	4	28	X	Qx = 24
6.00	10	10	0	Q = 0		6.00	6	24	X	Qx = 18
5.00	12	9	M	Qm = 3		5.00	8	20	___	________
4.00	14	8	___	________		4.00	10	16	___	________
3.00	16	7	___	________		3.00	12	12	___	________
2.00	18	6	___	________		2.00	14	8	___	________

Depicting the U.S.-German trade market equilibrium: In the 'Trade market' diagram below:
    Step 1: Plot the autarky price of the U.S. (Pa) on the vertical axis (Germany's has been plotted as Pa').
    Step 2: Draw the U.S. import demand (Dm) curve for possible trade prices below Pa ($6).
    Step 3: Use Dm and Sx' to determine the equilibrium free-trade price and quantity traded.


U.S. market	Trade market	German market