Economics of International Trade

Day 1,246, 10:14 • Published in Romania Canada • by lucifer_ultionis

Following the comments on Free Trade in my previous article, I will try to present shortly the effects of Trade on the national economy considering different exchange rates.

Requirements:
1. Supply and Demand (you can learn it easily here)
2. Acknowledge the fact that all prices in eRepublik can be converted to gold.

Assumptions:
1. Suppose no license costs (of 20 gold currently)
2. No tariffs.
3. Suppose there are no national currencies.

Under such circumstances, there are profit opportunities whenever the price in gold of a product is cheaper in one country than it is in another. Suppose in Romania grain (0.25 Gold/Grain) is cheaper than in Canada (0.5Gold/Grain)
This will give a good incentive for anyone to buy Grain in Romania from the Market and sell it in the market of Canada, leaving you with a very good profit. When you do this you affect the Demand in Romania and the Supply in Canada. The Graph (1.1) below shows the effect of the increase in demand. If you're a small fish, you won't change the equilibrium price much, you will change it though if you're a Big fish or if many small users like you do it.


In Canada (the importing country), the situation is a little bit different. Specifically, since you put the grain in the market the supply increases (from S1 to Supply) as shown in the graph (1.2) , changing the Price from P1 to P0:


The decrease in equilibrium price in Canada (from 0.5 gold to let's say 0.4) and the increase in price of grain in Romania (from 0.25 to ... let's suppose 0.3) reduces your speculative profits by ... MANY percent! (I'm an Economist, not an Accountant to do the calculations 🙂 )
And this trend will continue until THE PRICES are EQUAL. This is called the LAW of ONE PRICE.

Any questions until now? 🙂 Because tomorrow we will be addressing the question of what will happen when National Currencies are added into the model. Hopefully everything is clear until now.