- [Narrator] In this and the next video
we're gonna learn how to calculate opportunity cost
and determine who has the comparative advantage
in the goods production using data
from both an output table and an input table.
If we look at our PPC's in the graph
on the left, we see the potential outputs
of two goods, shoes and basketballs
for two different countries, country A
in blue and country B in green.
Notice that the data on this PPC
is also represented in the table on the right.
Country A can produce up to six pairs of shoes per worker
or up to eight basketballs per worker.
Contrast that with country B which
can produce up to four pairs of shoes
or four basketballs with a single worker.
Notice that in this table, the variable,
the data that appears in the table
is the output.
This is the potential output of the two goods
that the country can produce with
a fixed amount of inputs.
Each worker in other words, workers are input,
each worker can produce the numbers
of basketballs and shoes indicated in the table.
To calculate the opportunity cost
of shoes and basketballs in these two countries,
we can use the following method.
We know that for every six pairs of shoes,
I'll write six s, country A produces,
it gives up eight basketballs.
The resources needed to produce six shoes
could also produce eight basketballs.
To find the opportunity cost of shoes
all I have to do is divide both sides
of this equation by six and I can see
that the opportunity cost of one pair of shoes
is 8/6 or 4/3 of a basketball.
Now I like to convert these fractions to decimals
because it's easier to compare decimals
against one another than it is to compare fractions
which may possibly have different denominators.
I'm gonna go ahead and convert this 4/3 to a decimal
and that gives me an opportunity cost
of 1.33 basketballs per pair of shoes
produced in country A.
Let's now calculate the opportunity cost
of basketballs in terms of shoes.
Country A can produce either eight basketballs
or six shoes.
To find the cost of basketballs I just divide
both sides by eight here.
I get an opportunity cost of 3/4 of
a pair of shoes per basketball.
Again I'm gonna convert this to a decimal
to make it easier to compare opportunity costs
across countries.
3/4 of a shoe comes out to 0.75 pairs
of shoes per basketball.
I now have my opportunity costs
of shoes and basketballs for country A.
It's gonna be a lot quicker to calculate
these opportunity costs for country B
because country B can produce either four pairs
of shoes or four basketballs,
giving the country A opportunity cost of shoes
of one basketball per pair of shoes.
Likewise for basketballs, with the resources
it takes to produce four basketballs,
the country could have produce four pairs of shoes.
Divide both sides by four and I get
a cost of basketballs of one pair
of shoes per basketball.
Now I have all the information I need
to determine who has the comparative advantage
in these two goods.
With that information I know how
the country's can specialize and trade
with one another in a way that benefits
both countries mutually.
Let's first look at shoes.
We can see that country A can produce
shoes at the opportunity cost of 1.33 basketballs per shoe
and country B can produce shoes
at the opportunity cost of one basketball per pair of shoes.
Clearly country B can produce shoes
at the lower opportunity cost.
So country B should specialize
in shoe production since that's what it
has a comparative advantage in.
For basketballs country A can produce basketballs
at an opportunity cost of 0.75 pairs
of shoes per basketball, whereas country B
must give up one pair of shoes per basketball
giving country A the comparative advantage
due to its lower opportunity cost
of basketball production.
With this information we can come up
with some conclusions.
First, we know that country A
should specialize in basketball production,
because it can produce basketballs
at a lower opportunity cost than country B.
Next we know that country B should specialize
in shoe production due to its lower opportunity cost
of one basketball per pair of shoes
compared to 1.33 basketballs per pair of shoes
in country A.
Let's go back over to our PPC on which
we'll indicate the points at which
both country's A and B will produce
based on the principle of comparative advantage.
Country A is gonna produce nothing but basketballs
due to its lower opportunity cost.
Putting country A down here, on its production
possibilities curve, country B will then produce
nothing but shoes due to its lower opportunity cost
putting country B at this point
on this production possibilities curve.
Now you may be wondering how does country B
get basketballs if it's not producing
any domestically.
How does country A get shoes if it's not producing
any domestically?
Of course the answer to that lies in trade.
By trading with one another both countries
will be able to consume some combination
of basketballs and shoes that is beyond
each country's domestic production possibilities.
So these dash lines that I'm drawing now
represent what we could call
the trading possibilities curves
of both country's A and B.
Through specialization and trade,
a country can consume at a point beyond
what would be possible if it were
to produce everything for itself
without trading with other countries.
The two dots here that I'll label X and Y
represent possible levels of consumption
which lie beyond what the country
would have been able to achieve
if they had chosen to try to produce
both shoes and basketballs for themselves.
In the next video we're gonna look
at a different type of situation
in which we're given not the number
of outputs that a country can produce,
rather the amount of inputs needed
to produce a single unit of two different goods.