The basis of trade

1. The basis of trade 1. Absolute Advantage New Zealand, with its temperate climate, has ideal growing conditions for grass and so a natural advantage over Samoa in the production of sheep meat. Samoa, with its tropical climate, has ideal growing conditions for tropical fruit and so a natural advantage over NZ in the production of these tropical fruit. New Zealand can produce more sheep meat than Samoa, so has an absolute advantage in this product. Samoa can produce more tropical fruit than NZ, so has an absolute advantage in this product.

2. The basis of trade 1. Absolute Advantage If there were no trade • NZ would split its resources, producing: • 10 tonnes of sheep meat, and • 4 tonnes of tropical fruit • Samoa would split its resources, producing: • 2 tonnes of sheep meat, and • 10 tonnes of tropical fruit • Total production from the two economies before trade: • 12 tonnes of sheep meat, and • 14 tonnes of tropical fruit

3. Fruit Fruit NZ Samoa 20 8 Meat Meat 20 4 The basis of trade 1. Absolute Advantage Each economy would produce and consume at these points on their frontiers. If there were no trade • NZ would split its resources, producing: • 10 tonnes of sheep meat, and • 4 tonnes of tropical fruit • Samoa would split its resources, producing: • 2 tonnes of sheep meat, and • 10 tonnes of tropical fruit • Total production from the two economies before trade: • 12 tonnes of sheep meat, and • 14 tonnes of tropical fruit

4. Fruit Fruit NZ Samoa 20 8 Meat Meat 20 4 The basis of trade 1. Absolute Advantage If each country specialised, then traded: • NZ would produce only meat: • 20 tonnes of sheep meat, and • 0 tonnes of tropical fruit • Samoa would produce only tropical fruit: • 0 tonnes of sheep meat, and • 20 tonnes of tropical fruit • Total production from the two economies before trade: • 12 tonnes of sheep meat, and • 14 tonnes of tropical fruit • Total production from the two economies after specialisation and trade: • 20 tonnes of sheep meat, and • 20 tonnes of tropical fruit there are Gains from Trade

5. Fruit Fruit NZ Samoa 20 imports exports 8 Meat Meat 20 4 exports imports The basis of trade 1. Absolute Advantage If the total output was split between the two countries, they would be able to consume 10 tonnes of each product. • Total production from the two economies before trade: • 12 tonnes of sheep meat, and • 14 tonnes of tropical fruit • Total production from the two economies after specialisation and trade: • 20 tonnes of sheep meat, and • 20 tonnes of tropical fruit there are Gains from Trade

6. Fruit Fruit NZ Samoa 20 imports exports 8 Meat Meat 20 4 exports imports The basis of trade 1. Absolute Advantage the Gains from Trade are 8 tonnes of sheep meat and 6 tonnes of tropical fruit • Total production from the two economies before trade: • 12 tonnes of sheep meat, and • 14 tonnes of tropical fruit • Total production from the two economies after specialisation and trade: • 20 tonnes of sheep meat, and • 20 tonnes of tropical fruit

7. so... what happens when one country has absolute an advantage ? in BOTH products

8. The basis of trade 2. Comparative Advantage Australia, as a continent, has a range of growing conditions and so a natural advantage over Samoa in the production of both sheep meat and tropical fruit. Australia has an absolute advantage in both products . We need to compare opportunity costs to identify if there would be any gains from trade.

9. The basis of trade 2. Comparative Advantage In Australia, the opportunity cost of: In Samoa, the opportunity cost of: 1.2 5 0.83 0.2 In which country is sheep meat cheapest? Australia has a comparative advantage in the production of sheep meat.

10. The basis of trade 2. Comparative Advantage In Australia, the opportunity cost of: In Samoa, the opportunity cost of: 1.2 5 0.83 0.2 In which country is tropical fruit cheapest? Samoa has a comparative advantage in the production of tropical fruit.

11. The basis of trade 2. Comparative Advantage Gains from Trade With trade, each country specialises in the production in which they have a comparative advantage, and negotiate to exchange their surplus output for the imports they need.

12. Fruit Fruit imports exports Meat Meat imports exports The basis of trade 2. Comparative Advantage Gains from Trade Australia Samoa 24 20 20 4 If Australia exports 4 tonnes of sheep meat to Samoa, and imports 10 tonnes of tropical fruit it will be able to consume beyond its production possibility frontier. So, Samoa is importing 4 tonnes of sheep meat from Australia, and exports 10 tonnes of tropical fruit. It, also, will be able to consume beyond its production possibility frontier.