FIGURE 4 DETERMINING THE TERMS OF TRADE
imagePanel A shows the supply and demand of golf clubs in the United States; the upward slope of the supply curve reflects increasing opportunity costs to produce more golf clubs. The United States begins in pretrade equilibrium at $600 and South Korea’s initial equilibrium is at $1,000. With trade, Korean consumers will begin buying American golf clubs because of their lower price. American golf club makers will increase production to meet this new demand. Korean golf club firms will see sales of their golf clubs decline as prices begin to fall. Ignoring transport costs, trade will continue until prices reach $800. At this point, U.S. exports (2,000) are just equal to Korean imports (2,000).