HOW TO CREATE OFFER CURVE by Siti Hajar and Nur Syaheeda

HOW TO CREATE OFFER CURVE

by Siti Hajar and Nur Syaheeda

In economics and particularly in international trade, an offer curve shows the quantity of one type of product that an agent will export ("offer") for each quantity of another type of product that it imports. An offer curve is alternatively called the reciprocal demand curve of a country. It indicates the quantity of imports and exports that a country is willing to buy and sell on the world market at all possible relative prices. More specifically, the curve shows the country willingness to trade at various possible terms-of-trade.

Theory of reciprocal demand asserts that within the outer limits of the terms of trade, the actual terms of trade is determined by the relative strength of each country’s demand for the country’s product. Simply put, production costs determine the outer limits of the terms of trade, while reciprocal demand determines what the actual terms of trade will be within those limits.

The reciprocal-demand theory best applies when the two nations are of equal economic size, so that the demand of each nation has a noticeable effect on market price. However, if two nations are of unequal economic size, it is possible that the relative demand strength of the smaller nation will be dwarfed by that of the larger nation. In this case, the domestic exchange ratio of the larger nation will be prevail. Assuming the absence of monopoly elements working in the markets, the small nation can export as much of the commodity as it desires, enjoying large gains from trade.

Consider trade in crude oil and autos between Venezuela and United States before the rise of the Organization of Petroleum Exporting Countries (OPEC). Venezuela, as a small nation, accounted for only a very small share of the U.S. Venezuelan market, whereas the U.S. market share was overwhelmingly large. Because Venezuelan consumers and producers had no influence on market price levels, they were in effect price takers. In trading with the United States, no matter what the Venezuelan demand was for crude oil and autos, it was not strong enough to affect U.S. price levels. As a result, Venezuelan traded according to the U.S. domestic price ratio, buying and selling autos and crude oil at the price levels that existed within the United States.