There are two countries Australia and China which produce an

There are two countries, Australia and China, which produce and consume clothing. The quantities demanded and supplied for clothing in the two countries are:

QS * = -40 +9p*

a) Calculate the autarky price and the quantities supplied and demanded in each country. If the countries engage in free trade, which country will be the exporter and why?

b) Calculate the free trade world price, the quantities supplied and demanded in each country as well as exports and imports.

Solution

a) Autarky price and the quantity.

Australia : QS = QD

-10 + p = 50 - p

2p = 60

p = 30 , put this p in dmand or supply to get the quantity

Q = -10 + 30 = 20

Autarky price and quantity in Australia is P = 30 and Q = 20

For China :

QS* = QD*

-40 +9p* = 320 - 9p*

p* = 20

Q* = 140

Autarky price and quantity in China is p* = 20 and Q* = 140

IF the countries engage in free trade, China will be the exporter because China is producing more quantity than Australia and with less price as 20<30. So China will become the exporter if they both engage in free trade.

b) To find free trade price and quantity:

QS + QS* = QD + QD*

-10 + p - 40 + 9p* = 50 - p + 320 - 9p*

10p - 50 = 370 - 10p

p = 21 so free trade world price is 21.

At this price the quantity supplied and demanded in each country is

Australia : QS = -10 + 21 = 11

QD = 50 - 21 = 29

there is an excess demand of 29 - 11 = 18units. So Australia will import 18 units.

China : QS* = -40 + 9(21) = 149

QD = 320 - 9(21) = 131

so there is excess supply of 149 - 131 = 18

China will export 18 units to Australia.