The global price for a product
A basic assumption is that a uniform global price exists for each product, which no single country can change. In other words, the price of an item is fixed for each country, regardless of the volume of the country’s trading (buying and selling) in the specific item. The country always pays the same price, regardless of how much it buys from foreign sources. Similarly, the country always receives the same price, regardless of how much it sells to foreign consumers.
In practice, the assumption that the global price remains constant is not always correct, but it will nevertheless be used for purposes of this discussion.
When a country relies exclusively on imports to obtain a given product, the supply curve for that product will be similar to Curve S0 in diagram 5.24.
Supply curve of an imported item
Curve S0 is horizontal, and includes Point A, the global price for this item.
At $20 per unit, the country can import as much of the product as it wants. For example, if the global price of jeans is $20 per pair, the supply curve is completely horizontal at the $20 level.
Assume that the country also produces some of the goods being imported, and that Curve S1 in Diagram 5.24 represents the country’s internal supply. The final supply curve will be formed through a combination of S0 and S1 as follows:
To the left of Point A, S1 (the internal supply of the country) will take precedence, while S0 (global supply) will appear to the right of Point A. If D0 is the country’s internal demand curve, the equilibrium price will be below the global price. If D1 is the country’s internal demand curve, the equilibrium price will be equal to the global price.
The country’s price is never higher than the global price.
When there is no demand for a given product in a given country, and demand exists only in foreign countries, the demand curve for the product is similar to Diagram 5.25.
Demand curve for an export-only product
According to the graph, we can export as much as we want at $30 per unit.
If there is internal demand for the product and the internal demand curve is D1, then the final demand curve for the country will be a combination of D0 and D1, as follows:
- Left of Point A, D1 (local demand) will predominate.
- Right of Point, D0 (global demand) will take precedence.
This means that at any price above $30, producers will sell the items to local consumers. At prices below $30, producers will export their goods, and will not trade with local consumers.
If the internal supply curve is S0, the equilibrium price will be higher than the global price. If the internal supply curve is S1, the equilibrium price will be equal to the global price.
The country’s price cannot fall above the global price.