International Trade - Theory and Policy, 2010a

Figure 7.2 "Mexican Wheat Market: Autarky Equilibrium" shows the supply and demand for wheat in the
Mexican market. The supply curve represents the quantity of wheat that Mexican producers would be
willing to supply at every potential price in the Mexican market. The demand curve represents demand by
Mexican consumers at every potential price for wheat in the Mexican market. The intersection of demand
and supply corresponds to the equilibrium autarky price and quantity in Mexico. The price,PAutMex, is the
only price that will balance Mexican supply with demand for wheat.
Figure 7.2 Mexican Wheat Market: Autarky Equilibrium
The curves are drawn such that the U.S. autarky price is lower than the Mexican autarky price. This
implies that if these two countries were to move from autarky to free trade, the United States would
export wheat to Mexico. Once trade is opened, the higher Mexican price will induce profit-seeking U.S.
firms to sell their wheat in Mexico, where it commands a higher price initially. As wheat flows into
Mexico, the total supply of wheat rises, which will cause the price to fall. In the U.S. market, wheat supply
falls because of U.S. exports. The reduced supply raises the equilibrium price in the United States. These
prices move together as U.S. exports rise until the prices are equalized between the two markets. The free
trade price of wheat, PFT, is shared by both countries.
To derive the free trade price and the quantity traded, we can construct an export supply curve for the
United States and an import demand curve for Mexico. Notice that at prices above the autarky price in the
United States, there is excess supply of wheat—that is, supply exceeds demand. If we consider prices
either at or above the autarky price, we can derive an export supply curve for the United States. The
equation for export supply is given by
XSUS(PUS)=SUS(PUS)−DUS(PUS),
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