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. Production Possibilities for NZ Sheep Meat Tropical Fruit 20 15 2 10 4 5 6 8 Prod. Possibilities for Samoa Sheep Meat Tropical Fruit 4 3 5 2 10 1 15 20 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.

The basis of trade 1. Absolute Advantage If there were no trade Production Possibilities for NZ Sheep Meat Tropical Fruit 20 15 2 10 4 5 6 8 Prod. Possibilities for Samoa Sheep Meat Tropical Fruit 4 3 5 2 10 1 15 20 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

The basis of trade 1. Absolute Advantage NZ Samoa Fruit Meat 20 8 4 NZ Samoa 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

The basis of trade 1. Absolute Advantage NZ Samoa Fruit Meat 20 8 4 NZ Samoa 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

The basis of trade 1. Absolute Advantage NZ Samoa Fruit Meat 20 8 4 NZ Samoa exports imports exports imports 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

The basis of trade 1. Absolute Advantage NZ Samoa Fruit Meat 20 8 4 NZ Samoa exports imports exports imports 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

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

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. Production Possibilities for Oz Sheep Meat Tropical Fruit 20 15 6 10 12 5 18 24 Prod. Possibilities for Samoa Sheep Meat Tropical Fruit 4 3 5 2 10 1 15 20 Australia has an absolute advantage in both products . We need to compare opportunity costs to identify if there would be any gains from trade.

In which country is sheep meat cheapest? The basis of trade 2. Comparative Advantage Production Possibilities for Oz Sheep Meat Tropical Fruit 20 15 6 10 12 5 18 24 Prod. Possibilities for Samoa Sheep Meat Tropical Fruit 4 3 5 2 10 1 15 20 In Australia, the opportunity cost of: In Samoa, the opportunity cost of: 1 t of sheep meat is t of tropical fruit and 1 t of tropical fruit is t of sheep meat 1 t of sheep meat is t of tropical fruit and 1 t of tropical fruit is t of sheep meat 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.

In which country is tropical fruit cheapest? The basis of trade 2. Comparative Advantage Production Possibilities for Oz Sheep Meat Tropical Fruit 20 15 6 10 12 5 18 24 Prod. Possibilities for Samoa Sheep Meat Tropical Fruit 4 3 5 2 10 1 15 20 In Australia, the opportunity cost of: In Samoa, the opportunity cost of: 1 t of sheep meat is t of tropical fruit and 1 t of tropical fruit is t of sheep meat 1 t of sheep meat is t of tropical fruit and 1 t of tropical fruit is t of sheep meat 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.

The basis of trade 2. Comparative Advantage Gains from Trade Pre-Trade production and consumption Sheep Meat Tropical Fruit Australia 10 12 Samoa 2 After-Trade production Sheep Meat Tropical Fruit Australia 20 Samoa 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.

The basis of trade 2. Comparative Advantage Gains from Trade Australia Fruit Meat Australia Fruit Meat Samoa 24 20 exports imports 20 4 exports imports 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.