- [Instructor] We just finished demonstrating
how to calculate opportunity costs
and determine who has the comparative advantage
in a good's production using the data provided
in an output table or a production possibilities curve.
In that video we had a table showing the potential output
of two goods that two countries
could produce with a fixed amount of inputs.
In this video we're gonna look at how to calculate
opportunity cost and determine
who has a comparative advantage
of two goods' production
using the information from what we call an input table.
Let's look at this table and discuss
how it differs from the information provided
in the table in the previous video.
Notice that in this table
we are given not the number of units
of output that the two countries can produce,
rather we are given the number of workers needed
to produce a single unit of output.
So, the variable in this table
is the number of inputs needed to produce 1,000 watermelons
or a single bicycle.
With this information we can calculate
the opportunity costs of watermelons and bicycles
in these two countries
and determine who has the comparative advantage
in the two goods' production.
Let's start with watermelons in country X.
I find it very helpful to tell a story
when calculating opportunity cost
using data from an input table.
The four workers needed to produce a single watermelon
could have produced how many bicycles?
Four workers could have only produced 4/12
of a bicycle
because you would have needed three times
that many workers in order to produce
a single bicycle.
That means that per 1,000 watermelons,
this country's giving up only 1/3 of the bicycle.
Now, I'm gonna go ahead and convert that once again
to a decimal to make it easier to compare
opportunity cost between the two countries,
so 1/3 of a bicycle means that the opportunity cost
of watermelons is 0.33 bicycles per watermelon.
Four bicycles, 12 workers are needed.
The question is how many watermelons
could those 12 workers have produced?
The answer to that is 12 divided by four
because three times as many workers are needed
to produce a single bicycle
as are needed to produce 1,000 watermelons.
So, the opportunity cost of bicycles in terms of watermelons
is what could have been produced with those 12 workers
which is three watermelons
or in fact, 3,000 watermelons,
so say a 1,000 here.
3,000 watermelons are given up for every bicycle produced
because the 12 workers needed to produce a bicycle
could have produced 12 over four watermelons.
Let's do a similar method to calculate the opportunity cost
of watermelons and bicycles in country Y.
The six workers needed to produce 1,000 watermelons,
how many bicycles could they have produced?
Well, they would have needed 24 workers
to produce a single bicycle,
therefore in country Y, six over 24 bicycles
are given up in order to produce 1,000 watermelons,
that is 1/4 bicycle per watermelon,
convert that to a decimal,
I get 0.25 bicycles per watermelon.
How about bicycles?
What's the opportunity cost of bicycles?
How many watermelons could those 24 workers have produced?
Well, only six workers are needed
to produce 1,000 watermelons,
so the opportunity cost of each bicycle
is the 4,000 watermelons that could have been produced
using the 24 workers needed to produce a single bicycle.
We now have our opportunity costs
of bicycles and watermelons in these two countries.
The next thing we need to do
is simply determine who has the lower opportunity cost
for watermelons and who has the lower opportunity cost
for bicycles to determine
who should specialize based on the principle
of comparative advantage.
Let's start with watermelons.
You can see right away that a single watermelon
costs less of a bicycle in country Y
than it does in country X.
Only 1/4 or 0.25 bicycles are given up
compared to 0.33 in country X.
That gives country Y a comparative advantage
in watermelon production
and yes, predictably, country X
therefore has a comparative advantage
in bicycle production.
Country X gives up only 3,000 watermelons
for every bicycle it produces
whereas country Y gives up 4,000 watermelons
for every bicycle it produces.
Based on these calculations
we can come to the following conclusions.
Country X should specialize in the production of bicycles
because it has the lower opportunity cost
compared to country Y.
Next, country Y
should specialize in the production of watermelons
since it can produce watermelons
at a lower opportunity cost of 0.25 bicycles per watermelon
compared to country X which must give up 0.33 bicycles
per watermelon, so how do the two countries
get the goods that they do not produce?
Domestically they should trade with one another
and through trade both countries
can enjoy the good that they are not producing domestically
at a lower opportunity cost
than they could have produced it at domestically.
To review, the difference between what we called
an input table and what we called an output table
is that the variable given to us
is not the number of units of output
that can be produced,
rather it is the number of units
of inputs needed to produce a single unit of output.
The input in this table was the number of workers
needed to grow 1,000 watermelons
and the number of workers needed to produce
a single bicycle.
We can calculate opportunity cost
and determine who has comparative advantage
of two goods' productions from the data in an input table.