Opportunity cost and comparative advantage using an output table

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Opportunity cost and comparative advantage발음듣기

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[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.발음듣기

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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.발음듣기

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And as we see in many economic models this is a, I would argue oversimplified model.발음듣기

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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.발음듣기

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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.발음듣기

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And then try to deduce some things about comparative advantage.발음듣기

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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.발음듣기

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And I'll just draw it what is the max basketballs and this is all per worker per day.발음듣기

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And we would also think what is the max shoes , those look like socks.발음듣기

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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.발음듣기

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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.발음듣기

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Alright, now let's work this together so first in country A what is the maximum number of basketballs?발음듣기

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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.발음듣기

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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)발음듣기

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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.발음듣기

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But then if they put all of their energy into pairs of shoes they produce no basketballs they could produce four pairs of shoes.발음듣기

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And so it's as simple as that this output table is just showing the extremes from the production possibility curves for these countries.발음듣기

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Now with the information about the output table and these production possibility curves.발음듣기

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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.발음듣기

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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.발음듣기

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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.발음듣기

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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?발음듣기

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We'll start with what's the opportunity costs for producing basketballs in terms of shoes in country A?발음듣기

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Alright, well there's a couple of ways to think about it imagine a world in country A where you're producing no basketballs.발음듣기

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And you're producing six pairs of shoes but then if you were to increase the number of basketballs you produce by eight.발음듣기

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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.발음듣기

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And so in country A eight basketballs cost six shoes, let me write that down so in country A, eight basketballs.발음듣기

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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?발음듣기

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Well, six over eight is the same thing as three fourths or three fourths of a pair of shoes.발음듣기

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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?발음듣기

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Well, in country B if I go from no basketballs to four basketballs then I would have given up four pairs of shoes.발음듣기

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I would have given up four pairs of shoes so in country B.발음듣기

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So in B, four basketballs cost four pairs of shoes or divide both by four, you could have a basketball one basketball costs one pair of shoes.발음듣기

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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.발음듣기

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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.발음듣기

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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.발음듣기

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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.발음듣기

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I could produce either one of these and then if I want the opportunity costs for basketballs.발음듣기

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I divide both by eight and that's essentially what I did over here.발음듣기

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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.발음듣기

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Now let's do the opportunity cost for a pair of shoes in either country well.발음듣기

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There's a couple of ways to think about it you could just view it as the reciprocal.발음듣기

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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.발음듣기

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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.발음듣기

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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.발음듣기

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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.발음듣기

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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?발음듣기

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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.발음듣기

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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.발음듣기

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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.발음듣기

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So now we're ready to draw the connection given the opportunity costs that we calculated what country has the comparative advantage in basketballs?발음듣기

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Pause this video and try to figure it out.발음듣기

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So now let's look at the opportunity cost of producing a basketball in either country.발음듣기

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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.발음듣기

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So country A actually has a lower opportunity cost of producing basketballs and so it has the comparative advantage here comparative, comparative advantage.발음듣기

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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.발음듣기

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So it has a lower opportunity cost and this one actually might be a little bit counterintuitive.발음듣기

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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.발음듣기

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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.발음듣기

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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.발음듣기

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