Download Interregional Trade Model

Chap10 Inter-regional Trade
Two Region Trade Model
Assumptions
Excess demand and supply relationships
Graphical Analysis
Algebraic Representations
Extensions
transportation costs
taxes, subsidies
Prices vary over space
trade from surplus to deficit markets/regions
US corn belt vs Eastern markets
Wheat, pulses, canola – Western Canada
Transport services – link markets
- value-adding activity
- resources - marketing margin
Other Costs:
Inspection, certification, customs clearances, taxes, tariffs
Principles: Inter-regional trade &
price differentials
Assuming:
competitive markets
Sufficient information
No trade barriers
Homogeneous product
(no asymmetries)
Regions trade – surplus to deficit region
price differential = cost of transfer
Requires absolute (comparative) advantage ≥ transfer cost
Long-Run + Competitive forces (arbitrage)
Regions do not trade
price differential ≤ transfer cost
Three Market Model
Deficit Market
Market Price = $110
$10
$15
Surplus Market 2
Market Price = $95
Surplus Market 1
Market Price = $100
$15
Spatial Dimensions of Markets
Two Fundamental factors – price relationships
1
comparative (competitive) advantage
relative resource endowments
technology
scale economies
2
transportation (transfer) costs
Inter-regional Trade Model
Assumptions
Two regions
One good (homogeneous)
Competitive markets
No barriers to trade (quota, taxes)
Market equilibrium
with no trade (autarky)
with trade & transfer cost = 0
with trade & transfer cost > 0
Excess Demand & Supply Framework
Incentive for interregional trade
– price difference => arbitrage
Demand & Supply factors
Preferences, income, population
Factor endowments, technology, EOS
Excess Demand higher price market
ED = D - S
Excess Supply
lower price market
ES = S - D
Excess Demand
Region 1 High Price
P
Excess Demand
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
0
20
40
60
80
100
120
Q
0
10
20
30
40
Excess Supply
Region 2 low price
Excess Supply
P
16
16
14
14
12
12
10
10
8
8
6
6
4
4
2
2
0
0
10
20
30
40
Q
0
0
20
40
60
80
Inter-regional Equilibrium
No Transport Costs
Region 2 low price
Region 1 High Price
16
16
16
14
14
14
12
12
12
10
10
10
8
8
8
6
6
6
4
4
4
2
2
0
2
0
0
20
40
60
80
Imports
100
120
0
Q
10
20
30
40
0
0
20
40
Exports
60
Inter-regional Equilibrium
With Transport = $3/unit
Region 2 low price
Region 1 High Price
16
16
16
14
14
14
12
12
12
10
10
10
8
8
8
6
6
6
4
4
4
2
2
0
2
0
0
20
40
60
80
Imports
100
120
0
Q
10
20
30
40
0
0
20
40
Exports
60
Inter-regional Trade
Analytical Model
Market A:
Direct Demand & Supply
QD  100  4 P
QS  20  4 P
Indirect Demand & Supply
P  25  (1 / 4)  QD
P  5  (1 / 4)  QS
Autarky Equilibrium Market A:
Equilibrium Condition
QS  QD
QS  20  4P  100  4P  QD
 P  10
*
QS  20  4(10)  60  QD
( P , Q )  (10, 60)
*
*
Inter-regional Trade
Market B:
Direct Demand & Supply
QD  46  2 P
QS  30  2 P
Indirect Demand & Supply
P  23  (1 / 2)  QD
P  15  (1 / 2)  QS
Autarky Equilibrium Market B:
Equilibrium Condition
30  2P  46  2P
QS  QD
P 4
*
QS  30  2(4)  38  QD
 ( P , Q )  (4, 38)
*
*
Trade Equilibrium
Excess Demand & Supply Functions
Excess Demand (A) EDA  QD  QS
 (100  4 P)  (20  4 P) 
OR
80  8P
P  10  (1 / 8)  Q
Excess Supply (B)
ESB  QS  QD  (30  2P)  (46  2P)
 16  4P
OR
P  4  (1 / 4)  Q
Inter-regional Equilibrium
EDA  ESB
Equilibrium Condition
EDA  80  8P  16  4P  ESB
12 P  96  P  8
Q  80  8P
 Q  16
( P , Q )  (8,16)
*
*