Can You Explain Supply And Demand Analysis With No Trade Equilibrium?


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Tariq Habib Profile
Tariq Habib answered
The theory of comparative advantage can be illustrated through the analysis of supply and demand for goods in foreign trade. Consider the clothing market in America. Assume for simplicity that America is a small part of the market and therefore cannot affect the world price of clothing. This assumption will allow us to analyze supply and demand very easily. We assume that the price of clothing is determined in the world market and is equal to $4 per unit. Although transactions in international trade are carried out in different currencies, for now we can simplify by converting the foreign supply schedule into a dollar supply curve by using the current exchange rate.

Suppose that transportation costs or tariffs for clothing were prohibitive. Where would the no trade equilibrium lie? In this case the American market for clothing would be at the intersection of domestic supply and demand. At this no trade point prices would be relatively high at $8 per unit, and domestic producers would be meeting all the demand. I think this answer will satisfy your question.

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