- [Tutor] What we're going to do in this video
is draw a connection between the idea
of opportunity cost of producing a good
in a certain country and comparative advantage
between countries in a certain good
and below, right over here we have a chart,
that shows production possibility curves
for two different countries
and as we see in many economic models,
this is a, I would argue oversimplified model,
but it helps us get some insights,
where in each country workers can only produce
some combination of sneakers and basketballs
and to help us understand this and to appreciate
that you can see this information in multiple ways,
let's present this also as an output table,
output table, which you will sometimes see
and from either the production possibility curves
or from the output table,
we can calculate the opportunity costs of shoes
and the opportunity costs of basketballs
and then try to deduce some things
about comparative advantage.
So in an output table, we would look at country A
and we would look at country B and we would think about,
well, what is the max, and I'll just draw it,
what is the max basketballs
and this is all per worker per day
and we would also think what is the max shoes,
shoes, those look like socks, but you get the idea,
once again, per worker per day
and so let me draw a little chart here,
so we can do that
and so what I'd like you to do is pause this video
and see if you can fill in this chart,
what is the maximum basketballs per worker per day
in country A and then in country B
and then do the same thing for shoes.
Alright, now let's work this together,
so first in country A,
what is the maximum number of basketballs?
Well, if in country A,
they put all of their energy into basketballs,
we are right over here
on the production possibilities curve,
they can produce eight basketballs
and if on the other end of the curve,
they put all of their energy into shoes,
they would produce no basketballs and six pairs of shoes,
we're assuming that these are pairs of shoes,
that we're talking about, six pairs of shoes
and similarly if we go to company, (laughs)
if we go to country B,
I keep saying company, instead of country,
if we go to country B,
if we say what's the maximum number of basketballs,
well, if they put all their energy into basketballs,
we get four basketballs and no pairs of shoes,
so that's four basketballs, but then if they put
all of their energy into pairs of shoes,
they produce no basketballs,
they could produce four pairs of shoes
and so it's as simple as that,
this output table is just showing the extremes
from the production possibility curves for these countries.
Now with the information about the output table
and these production possibility curves,
let's calculate the opportunity cost,
so let me set up another table and let me just say
this is going to be our opportunity cost table, OC,
not Orange County, opportunity costs and once again,
it's going to be for country A and country B
and we're gonna think about the opportunity costs
of producing basketballs
and that's gonna be in terms of pairs of shoes
and then the opportunity costs for producing pairs of shoes
and that's going to be in terms of basketballs
and so let me set up another table
and so I encourage you once again, pause this video
and see if you can fill in this table,
what is the opportunity costs?
We'll start with what's the opportunity costs
for producing basketballs in terms of shoes in country A?
Alright, well there's a couple of ways to think about it,
imagine a world in country A,
where you're producing no basketballs
and you're producing six pairs of shoes,
but then if you were to increase the number
of basketballs you produce by eight,
so if you add eight basketballs,
well, you're gonna give up six pairs of shoes,
you see that right over here,
you give up six pairs of shoes and so in country A
eight basketballs cost six shoes, let me write that down,
so in country A, eight basketballs
and I'll just say B for short,
cost six, six S,
S is shoes for short,
or another way to think about it,
if you divide both of these by eight,
one basketball costs
six over eight shoes,
all I did was eight basketballs cost six shoes
and one basketball's gonna cost six divided by eight
pairs of shoes and so what is that gonna be?
Well, six over eight is the same thing as three fourths
or three fourths of a pair of shoes,
so one basketball costs three fourths of a pair of shoes
or we could say that as 0.75 S,
where S is a pair of shoes
for this is my simplified notation
and what about in country B?
Well, in country B,
if I go from no basketballs to four basketballs,
then I would have given up four pairs of shoes,
I would have given up four pairs of shoes,
so in country B, so in B, four,
four basketballs cost
four pairs of shoes
or divide both by four, you could have a basketball,
one basketball costs one pair of shoes,
so a basketball here in country B costs one pair of shoes,
so one pair of shoes, S once again is a pair of shoes
and you could have also gotten it
from this information here,
you could set up an equation, you could say look,
if I put all of, in country A, if I put,
so let's look at this part right over here,
you could say in country A, if I put all of my energy
into basketballs, I could produce eight basketballs,
but if I put that same energy into shoes,
I could produce six pairs of shoes,
so with the same energy, I could produce either one of these
and then if I want the opportunity costs for basketballs,
I divide both by eight and that's essentially
what I did over here and I get a basketball,
it costs six eighths of a pair of shoes
or three fourths of a pair of shoes,
which is exactly what I have over here.
Now let's do the opportunity cost
for a pair of shoes in either country,
well, there's a couple of ways to think about it,
you could just view it as the reciprocal
or you could even go back to this equation right over here,
if we are in country A, we would say six shoes,
if we put all our energy in shoes,
we could produce six of them
or six pairs of shoes, I should say
and if we put all of our energy into basketballs,
we could produce eight basketballs,
but if you divide by six, you get per pair of shoes
and so per each pair of shoes,
the energy to produce one pair of shoes is equivalent
to the energy to produce eight sixths of a basketball
and eight sixths is the same thing
as four thirds of a basketball
and if we wanted to write it as a decimal
just for simplicity or maybe to make it easier to compare,
we would say that this is approximately 1.33,
obviously the 3s just keep going on, it repeats forever,
but approximately 1.33 basketballs
is the cost of producing a shoe
and the opportunity cost of producing a shoe
in country A, 1.33 basketballs
and what about in country B?
Well, in country B
we could set up a similar type of equation,
where the same energy for four shoes,
I could produce four basketballs
and that's essentially what we set up
right over here on the left, you divide both sides by four,
the energy of a shoe is equal to the energy of a basketball,
or I should say the energy of a pair of shoes
is equal to the energy of making a basketball,
so the opportunity cost of making a pair of shoes
is equal to one basketball.
So now we're ready to draw the connection,
given the opportunity costs that we calculated,
what country has the comparative advantage in basketballs?
Pause this video and try to figure it out.
So now let's look at the opportunity cost
of producing a basketball in either country.
In country A, each basketball costs a worker
three fourths of a pair of shoes,
while in country B, it costs them a whole pair of shoes,
so country A actually has a lower opportunity cost
of producing basketballs
and so it has the comparative advantage here,
comparative, comparative advantage
and then if we look at shoes, it goes the other way around,
country A has an opportunity cost
of one and one third basketballs for every pair of shoes,
while country B has an opportunity cost
of only one basketball per pair of shoes,
so it has a lower opportunity cost
and this one actually might be
a little bit counterintuitive,
because if you look on the shoe axis right over here,
country A has the absolute advantage in producing shoes,
a worker per day in country A
can produce six pairs of shoes,
while a worker in country B
can only produce four pairs of shoes,
but even though country A has the absolute advantage,
it would actually make sense for country A
to focus on basketballs, while country B focuses on shoes
and in the next video, we'll see how they can
trade with each other to get to a scenario,
that is beyond their production possibility curves
and why focusing on your comparative advantage,
at least in this theoretical,
very simplified world, makes sense.