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 0

15 2

10 4

5 6

0 8

Prod. Possibilities for Samoa

Sheep Meat Tropical Fruit

4 0

3 5

2 10

1 15

0 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.

1. Absolute Advantage

Production Possibilities for NZ

Sheep Meat Tropical Fruit

20 0

15 2

10 4

5 6

0 8

Prod. Possibilities for Samoa

Sheep Meat Tropical Fruit

4 0

3 5

2 10

1 15

0 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

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

Fruit

Meat

Fruit

Meat20

20

8

4

NZ Samoa

Each economy would produce and consume at these points on their frontiers.

Total production from the two economies before trade:

• 12 tonnes of sheep meat, and• 14 tonnes of tropical fruit

Fruit

Meat

Fruit

Meat20

20

8

4

NZ Samoa

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 after specialisation and trade:

• 20 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

there are Gains from Trade

Fruit

Meat

Fruit

Meat20

20

8

4

NZ Samoa

1. Absolute Advantage

Total production from the two economies after specialisation and trade:

• 20 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

there are Gains from Trade

If the total output was split between the two countries, they would be able to consume 10 tonnes of each product .

expo

rts

impo

rts

exports imports

Fruit

Meat

Fruit

Meat20

20

8

4

NZ Samoa

1. Absolute Advantage

Total production from the two economies after specialisation and trade:

• 20 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

the Gains from Trade are 8 tonnes of sheep meat and 6 tonnes of tropical fruitex

port

s

impo

rts

exports imports

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 0

15 6

10 12

5 18

0 24

Prod. Possibilities for Samoa

Sheep Meat Tropical Fruit

4 0

3 5

2 10

1 15

0 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.

Production Possibilities for Oz

Sheep Meat Tropical Fruit

20 0

15 6

10 12

5 18

0 24

Prod. Possibilities for Samoa

Sheep Meat Tropical Fruit

4 0

3 5

2 10

1 15

0 20

2. Comparative Advantage

In Australia, 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

1.2

0.83

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

5

0.2

Australia has a comparative advantage in the production of sheep meat.

Production Possibilities for Oz

Sheep Meat Tropical Fruit

20 0

15 6

10 12

5 18

0 24

Prod. Possibilities for Samoa

Sheep Meat Tropical Fruit

4 0

3 5

2 10

1 15

0 20

In Australia, 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

1.2

0.83

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

5

0.2

Samoa has a comparative advantage in the production of tropical fruit.

2. Comparative Advantage

2. Comparative AdvantageGains from Trade

Pre-Trade production and consumption

Sheep Meat

Tropical Fruit

Australia 10 12

Samoa 2 10

After-Trade production

Sheep Meat

Tropical Fruit

Australia 20 0

Samoa 0 20

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.

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.

Fruit

Meat

Fruit

Meat20

20

24

4

Australia Samoa

2. Comparative AdvantageGains from Trade

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.

exports

impo

rts

expo

rts

imports