Lecture Notes: International Trade and World Price Determination

Introduction

• Professor Federman discusses the concept of international trade.
• Focus on how demand and supply curves determine world price for goods.

U.S. Market for Aluminum

• Equilibrium Price: $1.00
  • At this price, U.S. produces 100 million pounds.
• Price Scenarios:
  • $1.25: Supply exceeds demand, resulting in a 50 million pounds surplus.
  • $0.75: Demand exceeds supply, resulting in a shortage of 50 million pounds.

Export Supply and Import Demand Chart

• Derived from U.S. domestic market chart.
• If Price > $1.00:
  • Excess supply leads the U.S. to export.
• If Price < $1.00:
  • Excess demand leads the U.S. to import.
• Chart focuses on the right-hand side of the equilibrium point.

Canadian Market for Aluminum

• Equilibrium Price: $0.75
  • Aluminum is cheaper to produce in Canada due to lower electricity costs.
• Price Scenarios:
  • $1.25: Huge surplus (100 million pounds).
  • $0.50: Shortage of 50 million pounds.
• Export/Import Practices:
  • Above $0.75: Export along supply curve.
  • Below $0.75: Import along demand curve.

World Equilibrium Price

• Balancing imports and exports leads to a world equilibrium price.
• US and Canada Trade:
  • Canadians:
    • Above $0.75: Export.
    • Below $0.75: Import.
  • U.S.:
    • Above $1.00: Export.
    • Below $1.00: Import.
• World Price: Determined by where world imports equal world exports.
• Example Price: $0.88
  • Analyze effects on both U.S. and Canadian markets.

Conclusion

• Discussed the determination of world equilibrium price through supply and demand.
• Preview of next topic on trade barriers, tariffs, and quotas.
• End of lecture.