Trade by reuben fernee

Trade is mutually beneficial for both traders. This ability to do so makes everyone more efficient and creates more products for everyone. To explain this I will use a graph called a PPF (Production Possibilities Frontier).

This is Australia's PPF the horizontal axis is the ability to produce 1 good and the vertical axis is the production of a different good. This shows that you can produce 100 of product "V" or 50 of product "H" and any combination in between. If you wish to produce 30 of good "H" and 40 of product "V" then draw a line from the 30 horizontally to be in line with the 40 and that is the point that represents that much production. Australia cannot produce anything beyond the line because they don't have that much workers, machines or etc. If Australia messes up their resources and creates something behind the line then the workers are not being used effectively and is inefficient. If the combination of production is on the line then the resources are used efficiently.
Now this is China's PPF. Now the numbers are different for producing goods "V" and "H". China can only produce 80 of good "H" Australia can produce 100 this means that Australia has an absolute advantage in the production of "V". Australia also has an absolute advantage in the production of "H". So Australia should produce each product alone right. No. We need to calculate the amount of each product you give up to produce 1 of each good. E.G. It costs 2 units of "V" to produce 1 unit of "H" because the time that it takes to make 1 "H" you must give up the manpower to create 2 "V". So china have a comparative advantage in the production of "V" because it takes 1 "H" to create 16 "V" and for Australia is costs 1 "H" to create 2 "V". So if Australia gives China 8 "V" for 1 "H" then both get a better deal than if they try to make it themselves.

Made with Adobe Slate

Make your words and images move.

Get Slate

Report Abuse

If you feel that this video content violates the Adobe Terms of Use, you may report this content by filling out this quick form.

To report a Copyright Violation, please follow Section 17 in the Terms of Use.