Question

How can a country’s supply and demand curves for a product be used to determine the country’s supply-of-exports curve? What does the supply-of-exports curve mean?

Answer 1

Export Supply Curve

It is an upward sloping curve that shows the quantity of export the foreign business is willing to provide to the foreign consumers at each price.

ESC= Quantity of export the Foreign producer is supplying - Quantity of good the Foreign consumers are demanding, at each price.

Case:-

Suppose, there are two countries A and B and they are both producing sugar.

These countries have their own domestic demand and supply curves existing in the economy.

>> Without trade

A= Equilibrium Price at 14 and output 40

B= Equilibrium Price at 26 and output 90

>> With international trade between two nations

This will induce the profit-making businesses to start trading. The producers in A nation will be selling sugar in the B at a higher price.

The results-

The supply of the A nation will increase until the sugar is exported to B. After the trade, with the decrease in the supply of sugar in A country, the price of sugar will rise in A.

Previously, the supply of sugar in the B nation was less but the import from A, the supply will increase which will decrease the price of the sugar in B.

This will continue until the price and quantity of both nations are in equilibrium.

Now as the trade is at the state of standstill, the supply in A nation will increase.

For example, the equilibrium is at,

Price of A and B = 18

Supply of A= 50, consumer demand of A= 25

Supply of B= 80, consumer demand of B= 95

Now, producers of A will be able to sell 25 instead of the whole 50 as the consumers of A have the demand of 25 only.

The left 25 will be sold to B where the supply is at 80 but consumers demand 95.

This will also affect the income distribution of the country which will make the countries more willing to encourage foreign trade.

*This is the scenario of free trade between the countries.

The above case sufficiently explains how the demand and supply curve of the country can be used to determine the supply-export-curve of the country.