The amount of a good or a service a nation will export or import depends on differences between the equilibrium world price and the equilibrium domestic price.



World Price: The price that equates the quantities supplied and demanded globally. Determined by the world supply and demand.

Domestic Price: The price that would prevail in a closed economy that does not engage in international trade.

* In the absence of trade, domestic prices may or may not be equal to world prices.

Before trade: Americans firm produce Qe cars at Price Pd.

With trade: American firms will produce Q1 cars as they import the rest at the price of Pw.

• With trade, Q3 -Q1 cars will be imported in order to suffice the demand at Price level Pw.

NOTE:

• Sworld is perfectly elastic because there are numerous amounts of automobile factories that are in competition with each other.
• In other words, all firms become price takers in the global market
  
• Pw < Pd because other countries have a comparative advantage in automobiles when compared to the U.S.. Thus, in this scenario, the US should import from other countries that has a comparative advantage.
• This allows the country such as US to be more efficient, because they are specializing in a skill with a low oppurtunity cost and trading with other countries in exchange for their specialized goods and services.