What is the importance of the doctrine of reciprocal demand in the theory of international trade?
- NCLv 71 decade agoFavorite Answer
Depends on how you define reciprocal demand. If you consider two trading countries without considering the rest of the world, reciprocal demand is not necessarily a good theory. Take China and the U.S., for example. China has a substantial trade surplus with the U.S., so the reciprocal demand theory suggests that China must have a lot or demand for U.S. goods. Well, not really; China has a lot of demand for U.S. ASSETS (such as Treasury bonds). When it comes to goods, China uses its trade surplus with U.S. (as well as with EU and Hong Kong) to finance its modest trade deficits with Japan and Taiwan. Generally, though, China has been using its trade susplus to buy foreign assets...
Reciprocal demand is a good theory when you consider a single country vs. the rest of the world (i.e., exports create demand for imports from somewhere, not necessarily from the same countries the country in question exports to) and consider asset markets along with commodity markets (i.e., exports may create demand for imports, but they may create demand for foreign assets as well).
- 1 decade ago
Normally when we think of trade in general, we think about the ideas of supply and demand and how they relate to each other. When it comes to international trade, the notion of "reciprocial demand" makes us think about how demand and demand relate to each other as well. Basically the concept of reciprocal demand is about how there is a trading equilibrium when Country X's demand for Country Y's products is linked up with Country Y's demand for Country X's products.
For example, consider a situation (totally oversimplified, but it might help) where Country X produced oranges but no apples. Maybe Country X would like to produce apples, but for whatever reason (climate, lack of infrastructure, or other barriers to entry) they can't. Country Y produces apples, but not oranges, and doesn't produce oranges for the similar reasons why Country X doesn't produce apples. The people in both countries want both kinds of fruit, hence the idea of "reciprocal demand," which just means that there is demand for what the first country produces in the second country, and there is demand for what the second country produces in the first. The two countries can engage in trade that satisfies the demand in each nation for the other's product.