Final answer:
The interaction of world supply and demand determines the equilibrium world price, which is the price level at which goods or services are traded internationally. Trade between countries affects domestic markets, adjusting domestic prices to align with the world price, as seen in supply and demand diagrams for each country before and after trade.
Step-by-step explanation:
The interaction of world supply and demand determines the equilibrium world price. In an open-market economy where countries are trading with each other, these forces dictate the price at which goods or services are traded internationally. Before trade, each country's domestic market will have its own equilibrium price, determined by domestic supply and demand. Once trade is introduced into the system, these domestic prices adjust to a new equilibrium that reflects the trading opportunities, leading to an equilibrium world price.
Sketching two supply and demand diagrams for each country before trade and after trade illustrates this concept. In the absence of trade, the equilibrium price would be where the supply and demand curves intersect within each country. When trade is allowed, the world price becomes the relevant variable, which affects the levels of exports and imports between countries.
In international trade, the equilibrium price that balances global supply and demand influences how a domestic market will respond, with potential changes in the quantity exported or imported. These effects can be represented graphically where the new equilibrium reflects the intersection of the world supply and demand curves.