The determination of equilibrium terms of trade can be graphically illustrated with the help of offer curve a geometrical technique developed by Marshall. The offer curve is a typical demand curve as it shows the demand for one commodity (imports) in terms of the supply of another commodity (exports).
We take up two countries, India and England. India produces only wheat and England only cloth. OI is India’s offer curve indicating India’s demand for cloth in terms of wheat.
It represents the quantities of wheat which India is willing to offer in exchange for English cloth. As the quantity of cloth increases, India will be offering lesser and lesser amount of wheat in exchange for cloth.
For example, in exchange for KW cloth, India is willing to offer OW wheat. Similarly, OE is England’s offer curve of cloth for wheat, representing England’s demand for Indian wheat.
For example, England is willing to offer CW cloth in exchange for OW wheat. T is the equilibrium point where TP cloth is exchanged for OP wheat. Here reciprocal demands are equal. Line OT shows the equilibrium terms of trade.