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Introduction
• Trade - an integral part of food system• Major market for our products – corn,
cotton, soybeans, chicken• Major source of products for our diet –
bananas, coffee, cocoa, vegetables, spices
• Issues to be examined– Demand and supply of traded products– Exchange rates and trade policy
Key concept - excess demand
Excess demand is the amount by which quantity demanded exceeds quantity supplied at a particular price
An example – beef demand
Price/lb Quantity
lbs/cap
Price/lb Quantity
lbs/cap
$5.00 50 $3.75 75
$4.75 55 $3.50 80
$4.50 60 $3.25 85
$4.25 65 $3.00 90
$4.00 70 $2.75 95
An example – beef supply
Price/lb Quantity
lbs/cap
Price/lb Quantity lbs/cap
$3.00 60 $4.25 72.5
$3.25 62.5 $4.50 75
$3.50 65 $4.75 77.5
$3.75 67.5 $5.00 80
$4.00 70 $5.25 82.5
Excess beef demandPrice Q Demand Q Supply E Demand
$5.00 50 80 -30
$4.75 55 77.5 -22.5
$4.50 60 75 -15
$4.25 65 72.5 -7.5
$4.00 70 70 0
$3.75 75 67.5 7.5
$3.50 80 65 15
$3.25 85 62.5 22.5
$3.00 90 60 30
Some points about excess demand
• Much more elastic than regular demand since it reflects simultaneous changes in domestic supply and demand
• Excess demand defines the demand curve for imports by a country
Notes on excess supply
• Much more elastic than regular supply since reflects changes in both domestic supply and demand
• Defines the potential supply of exports by a country
Excess supply of Mexican beef
Quantity Price Dollars Price Pesos
10 pesos/$1
30 $4.00 40
22.5 $3.75 37.5
15 $3.50 35
7.5 $3.25 32.5
0 $3.00 30
Notes about trade
• At $3.50, amount that US is short (in deficit) is exactly the amount that rest of world (Mexico) is long (willing to supply)
• No coincidence, based on excess demand for US and excess supply for ROW
• With trade - price is lower in the United States than without trade for what we import
Exports
• When our price is lower than the world price, we will export – corn
• This removes corn from our market – raises our price
• It puts U.S. corn in other markets – lowers their price
Exchange Rates
• Suppose the Dollar rises in value compared to Peso, $1 buys more Pesos – it bought 10 before, now it buys 20
• This means that something priced at 40 pesos costs a U.S. buyer less than before when paid for in dollars
• Take the case where $1 now buys 20 Pesos• Mexican beef priced at 40 pesos now costs
$2.00 per pound, not $4.00• Everything we buy from Mexico is now on sale
Excess supply of Mexican beefQuantity Price
Dollars 10/1
Price Pesos
Price Dollars
20/1
30 $4.00 40 $2.00
22.5 $3.75 37.5 $1.875
15 $3.50 35 $1.75
7.5 $3.25 32.5 $1.625
0 $3.00 30 $1.50
0 7.5 15 22.5 30 37.5 45 52.5 60$0.00
$1.00
$2.00
$3.00
$4.00
$5.00
Beef MarketCheap Peso
ESMexico
EDUS
Qtrade
P*
ESMexico'
P**
Q**trade
More on exchange rates
• If Peso falls in value (dollar rises in value = strong dollar) everything we buy from Mexico costs less and everything Mexico buys from us costs more
• If Peso rises in value (dollar falls in value – weak dollar) everything we buy from Mexico costs more and everything Mexico buys from us costs less
More on exchange rates• Strong dollar shifts supply curve for U.S. imports
down (to the right) and rotates the curve clockwise
• Weak dollar shifts the supply curve for U.S. imports up (to the left) and rotates the curve counterclockwise
• Strong dollar shifts supply curve for U.S. exports up (to the left) and rotates the curve counterclockwise
• Weak dollar shifts supply for U.S. exports down (to the right) and rotates the curve clockwise
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