Free Trade Diagrams




Remember: The point of this exercise is to show that even with only comparative and not absolute advantage, both countries gain from trade. If one country has large absolute advantage in most goods then its advantage will be smaller than the other country. In this example Au gains more than NZ in the compatative advantage example.

What do you need to know for exams: I will give you 2 x 2 arrays for countries and you must be able to point out absolute and comparative advantage and know the result that there are gains from trade.


Politics of trade: Remember that while the country as a whole may gain from trade, not every political group in the country gains. There are winners and losers. The losers want government to protect them from the iron discipline of world markets. Think about this in human terms. If you had worked at a factory for 20 years and your parents had worked at the factory, you would be very mad if the industry moved abroad.