TRADE

WHY DO PEOPLE TRADE? We specialise in the activity we are best at. Then we trade the surplus we create, for

goods and services we want and need.

I am a doctor

because I am better

at that than any

thing else.

I am a farmer because I am

better at farming than

anything else.

These two individuals will rely on one anther. The doctor relies on the farmer to provide him food and the farmer relies on the doctor to provide him with medical care.

WHAT ARE THE ADVANTAGES OF PEOPLE SPECIALISING AND TRADING?

They are able to make the greatest productive contribution by producing what they are best at.

Producer better good or service than many others

Create a surplus of what they produce, which they can exchange for other goods and services

Can gain access to other goods and services that we may be incapable of producing ourselves.

WHY DO WE TRADE??? Individuals don’t have enough

resources to satisfy their unlimited wants, and neither do countries. This is because a country is made up of individuals.

WHY DO WE TRADE? NZ makes better use of it’s resources by

concentrating on producing agricultural products. Just like Japan with cars.

We could make cars as well but just not as cheaply as Japan.

Japan could also produce sheep, but just not as cheaply as we can.

PPC’S AND TRADE Without trade NZ would have to produce

a wide range of products to satisfy consumer choice.

With trade a country can allocate it’s resources more efficiently by concentrating on what it does best (at a lower cost or opportunity cost).

By having access to more efficiently produced imports a country can get the best out of it’s own resources.

ABSOLUTE ADVANTAGE When nations have resource advantages such as

climate that allows production of goods that other nations cannot produce(country A can produce a product at a lower cost than country B can)

Example: NZ needs 5 units of resources to produce one unit of

wine, where as Japan needs 10 units of resources to produce one unit of wine.

Alternatively, NZ can produce 20 units of wine with 100 units of resources and Japan can only produce 10 units of wine with 100 units of resources.

Text book page 238

Who has absolute advantage in shirts?sheep?

NZ

Fiji

Shirts Sheep

NZ 10 15

Fiji 8 4

COMPARATIVE ADVANTAGE When a country can produce one good at a lower

opportunity cost than another country.

When comparing one country in it’s production of two goods, we work out the opportunity cost (how many units of good B must they give up to make another unit of good A). This shows us where our resources are better utilised when put beside another countries OC.

Shirts Sheep NZ 10 15 Fiji 8 4

What is the opportunity cost of producing one unit of shirts for NZ? Fiji?

What is the opportunity cost of producing one unit of sheep for NZ? Fiji?

Who has comparative advantage in shirts? Sheep?

FijiNZShirts

Sheep

Shirts

Sheep

With trade, each country would produce the good they have the comparative advantage in. This would mean NZ would put all their resources into producing sheep and Fiji would put all their resources into producing shirts.

This being the case, the two countries would trade their goods that they specialise in.

Story of Comparative Advantage:Once upon a time there was a young lawyer Who set up office and did all the tasks.

That is both the secretarial tasks (typing, answering phone, receptionist) and the lawyer tasks (giving advice, representing clients in court, checking documents, etc.).

Three hours a day were spent on secretarial tasks and 5 spent on lawyer tasks.

In time the lawyer became very proficient in both areas. One day a school-leaver who was a modest typist came asking for a job. It didn’t look hopeful- the lawyer was clearly better in both areas. But there were gains to be made by comparing their skills and abilities and specialising.

Consider: when working alone the lawyer would earn $400 per day ($80 per hour for 5 hours).

Compare that to the situation where the lawyer spent all day practising law and the school leaver spent all day doing the secretarial tasks. The lawyer would earn $640 per day ($80 per hour for 8 hours).

The school leaver would earn $96 per day ($12 per hour for 8 hours). Clearly, the $96 would be paid out of the lawyer’s $640. As a result of specialising both people are better off.

How much better off is the lawyer?

ONSHORE AND OFFSHORE SERVICES

These are services that are traded internationally.

Onshore: services sold to overseas users but consumed/used within NZ.

Examples: Japanese tourists going on the Shotover Jet, eating out at restaurants, staying in a motel.

Offshore: services sold to overseas users and consumed/used outside of NZ.

Example: Air New Zealand transporting American passengers from Singapore to Sydney.