This weeks discussion is something a bit different. For the first six weeks we were building up models of producer and consumer choice, and finished with our market model of “perfect competition”. Given this we were able to discuss gains from trade where all producers were the same – but consumers were a bit different.
What we have done this week is actually quite similar – we have asked about gains from trade when the production possibilities were actually a bit different. Given that we have noted that, with different productive opportunities specialisation can generate gains from trade!
As a practice exercise, can you describe the current shock associated with COVID in terms of a Production Possibility Frontier diagram based on the Australia and NZ trade example in lectures. Graphically what does the shock look like? Could the shock increase New Zealand’s comparative advantage in making Wool? What does this mean?
I’ll put up an answer to this after you test on Monday – as this content is not in this test.