Opportunity costs and comparative advantage

Opportunity costs and comparative advantage

- [Instructor] Let's talk
about opportunity cost

and comparative advantage.

Comparative advantage just means a country

should specialize in trade in things

that they have the
lowest opportunity cost.

Absolute advantage is
the ability to produce

the same goods using fewer inputs

in another producer, or in other words,

you're more productive than the next best

or the other producer.

So let's assume to illustrate this,

let's assume we have the U.S.,

let's assume we have Canada.

Let's look at cars.

Let's look at computers.

The shorthand, computers is just C-O-M-P.

Let's assume that the U.S.
has an absolute advantage

in cars and computers.

We produce everything more
productively than Canada.

So say that's 20.

Let's say this is 40.

So if we're more productive than Canada,

so instead of 20, let's
put five down here.

And instead of 40,

let's put 20 down here.

In other words, the
U.S. is what, four times

as productive in producing cars.

Four times five is 20.

Two times 20 is 40, so
we're twice as productive

in producing computers.

Well now let's calculate
the opportunity cost.

Because remember the opportunity or rather

the comparative advantage is producing

at the lowest opportunity cost.

So opportunity cost of one car,

and let's look at the opportunity cost

of one computer.

So, looking at cars,

in this case,

if we produce 20 cars,
we give up 40 computers.

Easy way to per car is just take what,

40 divided by 20.

Divide both sides by 20.

There's several other ways of doing it.

And that's gonna give you opportunity cost

of producing cars is each car is two.

In Canada, what is it?

20 divided by five.

So every five cars it produce,
they give up 20 computers.

So the opportunity cost per car

is going to be four.

Oops I set 50, need to change
that a little bit don't I?

There 20 divided by five.

Make sure you get your numbers right.

Otherwise, you're gonna miss the problem.

That looks a little better to
get four that way, doesn't it?

What is the opposite?

Well it's opportunity
cost of one car is two

in the United States, four in Canada.

Well in that case it's gonna be 1/2

is the opportunity cost per computer,

and 1/4 is the opportunity cost in Canada

for one computer.

So which ones are smaller?

Well, it looks to me like

four versus two.

Two is smaller, so lower opportunity cost.

And Canada, so Canada should specialize

in producing computers.

U.S. should specialize in producing cars.

In which case, you're producing
at lower opportunity cost.

You're giving up less
so that both countries

are gonna be made better off.