International Economics >> The law of reciprocal demand
The Law of Reciprocal Demand and Terms of Trade
The questions that need now to be answered are: (i) How are the terms of trade between the nations is determined? and (ii) How is the demand for imports determined? An attempt was first made by 1.S. Mill to answer these questions by his Law of Reciprocal Demand. Edge worth and Marshall used the law of reciprocal demand and provided a more precise answer. The technique Marshall used is known as offer curve. In this chapter, we discuss the 'law of reciprocal demand' and the 'offer curve' and their use in determining the equilibrium in international trade.
The law of reciprocal demand
The 'law of reciprocal demand' explains how the barter rate, of exchange is determined between the two nations.
It is important to note here that if two countries are of unequal size, the law of reciprocal demand may not come into force. The reason is, "The price-ratio of the larger country will prevail and the smaller country can sell at prevailing price as much as it chooses. This is the importance of being unimportant.'?
The law of reciprocal demand and the offer curve
On the basis of Mill's law of reciprocal demand, Marshall' and Edge worth derived the offer curves of the trading countries. Their analysis was subsequently refined by Scitovsky, Meade and Lerner. The offer curves sometimes are also referred to as reciprocal demand curves. An offer curve shows the quantities of two goods a nation is willing to export and import at different rates of exchange. It shows both international demand and supply conditions, The different authors have used different techniques of deriving the offer curves. We illustrate now the derivation of offer curves through a simple method.
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