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Suppose there are only two countries in our world Australia and New Zealand. In a year...

Suppose there are only two countries in our world Australia and New Zealand. In a year Australia can produce 100 Sheep or 500 BBQs while New Zealand can produce either 150 Sheep or 400 BBQs. What is the PPC curve? If they were to specialise who would and in what BBQs or Sheep? If both countries were to spend half the year producing each of their products- explain how specialization and trade would benefit each?

Expert Solution

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production possibility curve

Production of half year

	Sheep	BBQ's
NZ	100	500
AS	150	400

Opportunity cost of production

in New Zealand

1 unit of sheep =500/100=5BBQs

so in New Zealand domestic market 1 sheep= 5 BBQs

similarly

1 unit BBQs = 100/500

1 unit BBQs =0.2 sheep

in Australia

1 unit of sheep =400/150

1 unit of sheep=2.67 unit BBQs

similarly

1 unit BBQs =150/400

1 unit BBQs =0.375 units of sheep

so New Zealand has an absolute advantage in the production of BBQs
and Australia has an absolute advantage in the production of sheep

in New Zealand domestic market is ready to exchange 5 BBQs in exchange of only 1 sheep whereas in Australia domestic market one unit sheep exchanged by only 2.67 so from free trade New Zealand has a chance to exchange 1 unit of sheep in less than 5 unit of BBQs whereas Australia has a chance to exchange 1 unit of sheep to get BBQs more than 2.67units
so trade will benefit each of them

Rahul Sunny answered 2 years ago

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Suppose there are only two countries in our world Australia and New Zealand. In a year...

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