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.
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.

2. 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

3. 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

4. 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

5. 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

6. 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

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.
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.

9. 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.

10. 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.

11. 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.

12. 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.