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A Tale of Two Islands – Part III: The Entrepreneur and the Innovator January 27, 2014 7:59 AM | Tagged as Comparative Advantage, free trade

WSJ January 6, 2014 Page A11:  NAFTA at 20: A Model for Trade Policy by Mary Anastasia O’Grady

WSJ January 13, 2014, Page A15:  Leading from the Front on Free Trade by Robert B. Zoellick

Fast forward two decades. Each island has planted seeds from the other island’s fruit. Both islands have orange and apple trees in abundance.

On the apple island, a young entrepreneur named Donoldo Trumpet discovers that the orange island has a poor water supply. However, the apple island has a large, ever flowing spring of fresh water. Much of the water from this spring simply flows into the ocean. After some test marketing with the orange island and obtaining use of the spring from the island council, Trumpet begins branding and bottling their water as “Apple Island Spring Water”. The process is complicated and requires talents that must be developed from many of the apple island population. If the apple islanders start bottling water, they will not have enough people to grow apples or oranges for their own needs.

Trumpet contacts the orange island and negotiates a deal. The orange island will expand their orchards and provide both apples and oranges to the apple island. The price will be low because the apple island will trade fresh water for apples and oranges. The price is in favor of the apple island who, in fact, has a modest “absolute advantage” in production of both apples and oranges, but a huge absolute advantage in fresh water, due to their natural resource and their ability to re-train their people to the expertise of the water business.

In this trade deal, both islands benefit, but the apple island benefits more. The orange island has the “comparative advantage” over the apple island in production of apples and oranges. The apple island cannot afford to grow their apples or oranges which would cause them to lose the water business. The apple island’s well-being is now centered on fresh water not apples or oranges. The orange island has a huge new market for their apples and oranges. Their well-being is increased, perhaps not as much as the apple island, but has increased over not doing business with the apple island.

Conversely, the apple island has a huge market for fresh water and their well-being increases by the wise, prudent, and economically sound use of their natural resource, fresh water. Their increase in well-being is somewhat greater than the orange island. Water is simply valued more than apples or oranges and is in short supply on the orange island.

As the water business develops, some of the strong, handsome young men from the orange island are brought in to supplement the workforce of Apple Island Spring Water Inc. providing additional income to the orange island when they return on the weekends for local soccer tournaments.

One of the young Orange guys has an idea. He sees an unused part of the Apple Island. He saves his new found income in the water business and eventually buys the land and turns it into a recreation village for both islands. This innovative young man eventually becomes an explorer and finds another unknown island and markets his recreation village to a new clientele.

Eventually, the two islands who rely on each other for their well-being sign a compact of peace. They commit to protecting each other and communicate regularly about common issues.

[The Biz Bucks Blog is primarily written to former students of Biz Bucks training courses to encourage their daily reading of the three opinion pages of the WSJ. This refreshes principles of Biz Bucks courses and improves business acumen on topics not discussed in Biz Bucks training.]

 


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