Question

1. Supply and Demand Illustration of Trade In January 2019 the cost of aluminum in US dollars is $0.85. Currently, in the global aluminum market, Australia is an exporting country and Germany is an importing country a) Treating Germany as a "small" country, illustrate the German supply and deman the absence of trade. b) If Germany weren't trading with the world, would Germany pay s0 85 for aluninum, or a price that is either higher or lower than S0.85 Explain why c) Now modify your diagram for Germany to show how the opportunity to trade at a global price of S0.85 affects Germany's consumer and producer suplus (compared with consumer and p surplus in the absence of trade). d) T reating Australia as a large" country, use supply and demand diagrams for Australia and the Rest to show how a recession in Australia, which reduces Australia's demand for Aluminum, will affect the world price for Aluminum?

Answer 1

a).

Consider the following fig.

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So, here “D” be the demand and “S” be the supply of “Aluminum” in Germany, => the autarkic equilibrium “P” will be determined by the intersection of “D” and “S”. So, here the equilibrium “P” is given by “Pe”.

b).

Now, if Germany will not be connected with the world trade, => the equilibrium autarkic price will prevail that is “Pe”. Now, the autarkic price can be more, less and exactly equal to “$0.85”. Since if Germany is in autarkic situation, => the price will totally depends on the “D” and “S” and not on the “world price”.

c).

Now, let’s assume that “P” is more than “0.85”, => under free trade “Pw=0.85” will prevail “Pe” will not prevail.

So, here as the “P” decreases implied “CS” increases by “A+B” and “PS” decrease by “A”. So, here the total surplus increases by “B”.

d).

Now, let’s assume that Australia is a large country, => have power to influence the world “P”. Consider the following fig.

So, here the initial world equilibrium “P” is given by “Pw1” the intersection of “MD1” and “XS1”. Now, recession cause the demand to decrease, => the import demand decrease to “MD2”, => the new world price decrease to “Pw2” the intersection of “MD2” and “XS1”. So, the world equilibrium price and the level of import both decreases.