World Incomes and Coffee
The question
Larenne is a small country that imports coffee at the going international market price, which sits below the price that would clear the Larenne market with no trade. Rapid growth abroad raises household incomes across the rest of the world, coffee is a normal good for those households, and incomes inside Larenne are unchanged. Show the effect of this change on the market for coffee in Larenne, assuming all else is held constant. Show the effect on the International Trade graph.
Equilibrium at Quantity 64, Price ($) 49
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World Incomes and Coffee: the worked answer
On the International Trade graph, The world price (Pw) shifts up.
Why The world price (Pw) shifts up
Richer households abroad buy more coffee, a normal good, so world demand grows and coffee trades for more on world markets. Larenne is too small to affect that price, so on its graph the world price line moves up, closer to the no-trade domestic equilibrium price. Incomes, tastes, and production costs inside Larenne are unchanged, so neither the domestic demand curve nor the domestic supply curve moves.
What happens to the equilibrium
As the world price line moves up, domestic quantity supplied increases and domestic quantity demanded falls, so imports narrow. Larenne's consumers pay more and lose surplus while its producers gain surplus, and if the world price ever reached the no-trade equilibrium price, imports would disappear.
The mistake students make on this one
The word "incomes" pulls many students into shifting Larenne's domestic demand curve to the right. The incomes that rose belong to consumers in other countries, and those consumers buy in the world market, not on this graph. Their extra buying reaches Larenne only through the price it must pay, so the world price moves up and Larenne's own buyers slide up an unchanged demand curve.
On exam day
Ask whose behavior changed and where those people buy. A change among foreign buyers or foreign sellers moves only the world price line; a change among the graphed country's own households or firms is what moves a domestic curve.
How this is graded
The checker reads every curve's position before and after your answer. You are marked correct only when The world price (Pw) shifts up and every other curve on the International Trade graph stays where it started — the same standard an AP reader applies to a drawn graph: the right shift, and nothing extra. There is no AI involved; the rubric is the geometry.
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