0:00:01.184,0:00:03.061 - [Instructor] The[br]countries of Kalos and Johto 0:00:03.061,0:00:04.546 can produce two goods. 0:00:04.546,0:00:07.330 Shiny charms and berries. 0:00:07.330,0:00:09.016 Yep, you got to love these worlds 0:00:09.016,0:00:12.095 created in these economics questions. 0:00:12.095,0:00:14.455 The table below describe the production 0:00:14.455,0:00:17.143 possibilities of each country in a day. 0:00:17.143,0:00:18.778 So here it tells us that Kalos, 0:00:18.778,0:00:21.329 if it puts all of its[br]energy behind charms, 0:00:21.329,0:00:23.322 it can produce 10 charms in a day. 0:00:23.322,0:00:25.387 But if it put all of its[br]energy behind berries, 0:00:25.387,0:00:27.975 it can produce 20 berries in a day. 0:00:27.975,0:00:29.646 And then Johto, all of its energy 0:00:29.646,0:00:34.348 behind charms, 25, all of its[br]energy behind berries, 75. 0:00:34.348,0:00:36.479 Given these numbers are[br]based on both countries 0:00:36.479,0:00:40.380 having the same labor and capital inputs, 0:00:40.380,0:00:43.797 who has the absolute advantage in charms? 0:00:45.137,0:00:48.443 So pause the video and see[br]if you can figure this out. 0:00:48.443,0:00:50.100 All right, so let's just remind ourselves. 0:00:50.100,0:00:53.256 Absolute advantage is just[br]who is more efficient? 0:00:53.256,0:00:56.523 Who, given the same[br]inputs, can produce more? 0:00:56.523,0:00:58.181 And they told us that these countries, 0:00:58.181,0:01:00.921 they have the same labor[br]and capital inputs, 0:01:00.921,0:01:02.142 so this is really just a question 0:01:02.142,0:01:04.261 of who can produce more charms in a day? 0:01:04.261,0:01:06.152 And you can see very clearly that Johto 0:01:06.152,0:01:08.163 can produce more charms in a day. 0:01:08.163,0:01:10.994 And so I would say Johto, 0:01:10.994,0:01:13.827 because they produce, let me write 0:01:16.153,0:01:17.303 that a little bit neater, 0:01:17.303,0:01:20.053 they produce more charms per day. 0:01:23.811,0:01:25.061 Charms per day. 0:01:26.254,0:01:27.671 With same inputs. 0:01:29.627,0:01:30.627 Same inputs. 0:01:32.206,0:01:34.641 So they are more efficient. 0:01:34.641,0:01:35.891 More efficient. 0:01:36.942,0:01:39.592 So they have the absolute advantage. 0:01:39.592,0:01:41.078 Now this is an interesting thing, 0:01:41.078,0:01:43.110 because our intuition might say 0:01:43.110,0:01:45.124 well whoever has the absolute advantage, 0:01:45.124,0:01:47.729 maybe they're the ones that[br]should be producing charms. 0:01:47.729,0:01:49.086 But this is what's interesting when 0:01:49.086,0:01:50.586 we study comparative advantage. 0:01:50.586,0:01:52.596 That is not always the case. 0:01:52.596,0:01:55.625 And I suspect that this[br]question will lead us there. 0:01:55.625,0:01:57.790 All right, next question. 0:01:57.790,0:01:59.786 They say calculate the opportunity cost 0:01:59.786,0:02:01.369 in Kalos of charms. 0:02:02.955,0:02:06.705 So the opportunity cost,[br]in Kalos, of charms. 0:02:07.559,0:02:11.833 So when Kalos decides[br]to produce 10 charms, 0:02:11.833,0:02:14.450 they're trading off 20 berries. 0:02:14.450,0:02:15.615 Or another way of thinking about it, 0:02:15.615,0:02:19.218 it costs them 20 berries[br]to produce 10 charms. 0:02:19.218,0:02:22.135 So we could say it costs 20 berries 0:02:27.104,0:02:30.854 for 10 charms, which is[br]equal to two berries, 0:02:34.921,0:02:37.588 two berries per charm, in Kalos. 0:02:41.512,0:02:42.345 So there you have it. 0:02:42.345,0:02:43.499 The opportunity cost, they trade off 0:02:43.499,0:02:45.155 two berries per charm. 0:02:45.155,0:02:46.872 And actually, let me make[br]it a little column here. 0:02:46.872,0:02:47.841 The opportunity cost. 0:02:47.841,0:02:50.591 So this is two berries per charm. 0:02:52.478,0:02:53.911 And I have a feeling, and if you're taking 0:02:53.911,0:02:57.083 an exam, say an AP exam,[br]it's not a bad idea 0:02:57.083,0:02:58.463 to just fill this thing out, 0:02:58.463,0:02:59.405 so what is the opportunity cost, 0:02:59.405,0:03:00.513 they haven't asked us that yet, 0:03:00.513,0:03:02.122 but I'm just gonna do it really fast. 0:03:02.122,0:03:06.107 What is the opportunity[br]cost of charms in Johto? 0:03:06.107,0:03:08.837 Well, they are trading[br]off, to produce 25 charms, 0:03:08.837,0:03:11.092 they trade off 75 berries. 0:03:11.092,0:03:13.260 So this would be 75 divided by 25, 0:03:13.260,0:03:16.427 this would be three berries per charm. 0:03:17.708,0:03:22.554 75 berries for 25 charms[br]is three berries per charm. 0:03:22.554,0:03:24.493 And if you want to know the[br]opportunity cost of berries, 0:03:24.493,0:03:27.234 well you can just take the[br]reciprocal of each of these. 0:03:27.234,0:03:29.613 So in Kalos, the opportunity cost 0:03:29.613,0:03:32.696 is one half charms, charms per berry. 0:03:36.552,0:03:40.719 And then in Johto, it is[br]one third charms per berry. 0:03:44.310,0:03:48.028 That if they wanted to produce 25 berries, 0:03:48.028,0:03:49.955 if they wanted to produce 75 berries, 0:03:49.955,0:03:53.011 they would trade off 25 charms. 0:03:53.011,0:03:55.736 So it would cost them 25[br]charms to produce 75 berries, 0:03:55.736,0:03:57.894 or one third of a charm per berry. 0:03:57.894,0:03:59.590 So I'm just doing a little bit of extra. 0:03:59.590,0:04:00.817 But then it's gonna be useful, 0:04:00.817,0:04:02.346 because in the next[br]question, they actually 0:04:02.346,0:04:05.797 are asking us, who, we'll[br]scroll up a little bit. 0:04:05.797,0:04:08.311 They're saying who has[br]the comparative advantage 0:04:08.311,0:04:10.709 in berries, explain. 0:04:10.709,0:04:13.903 So berries, whoever has[br]the lower opportunity cost 0:04:13.903,0:04:15.919 has the comparative advantage. 0:04:15.919,0:04:19.624 So we see here that Johto has the lower 0:04:19.624,0:04:21.916 opportunity cost in berries. 0:04:21.916,0:04:24.666 One third is lower than one half. 0:04:25.623,0:04:28.477 It's a lower opportunity[br]cost of producing a berry. 0:04:28.477,0:04:30.894 So Johto has one third charms 0:04:37.472,0:04:41.222 per berry opportunity[br]cost, opportunity cost. 0:04:45.066,0:04:47.316 Which is lower than Kalos', 0:04:52.215,0:04:56.382 Kalos' one half charms per[br]berry opportunity cost. 0:05:02.435,0:05:05.724 So Johto has comparative advantage. 0:05:05.724,0:05:07.807 So Johto has comparative, 0:05:12.042,0:05:14.792 comparative advantage in berries. 0:05:20.344,0:05:22.268 And I apologize a little[br]bit for my penmanship, 0:05:22.268,0:05:24.833 I'm trying to save time by[br]writing a little bit fast, 0:05:24.833,0:05:26.816 but hopefully me saying it[br]out loud at the same time 0:05:26.816,0:05:29.297 is making it somewhat legible. 0:05:29.297,0:05:30.130 All right. 0:05:30.130,0:05:31.150 So the next question. 0:05:31.150,0:05:34.086 If these countries were[br]to specialize in trade, 0:05:34.086,0:05:37.149 who would produce which good, explain. 0:05:37.149,0:05:38.395 Well whoever have the[br]comparative advantage 0:05:38.395,0:05:40.425 of each will produce that one. 0:05:40.425,0:05:43.342 So Kalos has comparative advantage, 0:05:44.531,0:05:47.531 Kalos has lower opportunity cost in, 0:05:50.840,0:05:54.127 in let's see, they have[br]the lower opportunity cost 0:05:54.127,0:05:56.336 when you compare them to, oh let me see, 0:05:56.336,0:05:57.373 let me put it this way. 0:05:57.373,0:05:59.212 For charms, let me write I this way, 0:05:59.212,0:06:03.296 Kalos has a lower[br]opportunity cost for charms. 0:06:03.296,0:06:05.796 Kalos has advantage in charms. 0:06:10.952,0:06:13.452 And then we already said Johto 0:06:15.281,0:06:17.364 has advantage in berries. 0:06:21.055,0:06:24.222 And so, Kalos, I keep saying it weird, 0:06:26.813,0:06:28.646 Kalos produces charms, 0:06:34.208,0:06:37.625 Johto produces berries, produces berries. 0:06:42.025,0:06:43.211 And once again, this goes back 0:06:43.211,0:06:45.188 to something we touched on at[br]the beginning of the video. 0:06:45.188,0:06:48.135 Even though Johto has[br]the absolute advantage, 0:06:48.135,0:06:51.016 in fact they have the[br]absolute advantage in either, 0:06:51.016,0:06:52.600 Johto is not, even though they can produce 0:06:52.600,0:06:55.356 charms way more efficiently than Kalos, 0:06:55.356,0:06:58.608 Johto is actually in this, if you buy 0:06:58.608,0:07:00.797 all the arguments of[br]comparative advantages, 0:07:00.797,0:07:03.024 Johto should actually produce the berries, 0:07:03.024,0:07:05.343 while Kalos should produce the charms, 0:07:05.343,0:07:07.217 because they have a lower opportunity cost 0:07:07.217,0:07:08.923 in terms of berries. 0:07:08.923,0:07:12.152 Now let's answer this last[br]question right over here. 0:07:12.152,0:07:14.418 What would be a trading price that Johto 0:07:14.418,0:07:18.671 and Kalos would agree[br]on to trade charms for? 0:07:18.671,0:07:20.319 Now you might be saying,[br]well what's a price, 0:07:20.319,0:07:21.685 I'm used to saying that in terms 0:07:21.685,0:07:24.523 of just maybe dollars or[br]some type of currency, 0:07:24.523,0:07:27.932 how do I answer a price right over here? 0:07:27.932,0:07:30.168 Well, the key is that we can give a price 0:07:30.168,0:07:32.611 in terms of opportunity cost. 0:07:32.611,0:07:35.926 So they want a price of charms. 0:07:35.926,0:07:39.121 So it really could be in terms of berries. 0:07:39.121,0:07:39.995 So let's see. 0:07:39.995,0:07:42.721 Let's look at each of[br]their cost of charms. 0:07:42.721,0:07:46.553 So, Kalos' opportunity costs of a charm 0:07:46.553,0:07:48.275 is two berries per charm, 0:07:48.275,0:07:50.713 Johto's in three berries per charm. 0:07:50.713,0:07:53.353 So let me rewrite that over here. 0:07:53.353,0:07:56.853 So Kalos, Kalos opportunity cost of charms 0:08:02.994,0:08:05.077 is two berries per charm. 0:08:10.115,0:08:13.532 And then Johto opportunity cost of charms 0:08:16.702,0:08:18.952 is three berries per charm. 0:08:20.978,0:08:22.229 And here we're going to appreciate 0:08:22.229,0:08:24.009 why comparative advantage works. 0:08:24.009,0:08:27.072 We said that Kalos would be the one 0:08:27.072,0:08:29.421 that would focus on the charms. 0:08:29.421,0:08:30.254 And so notice. 0:08:30.254,0:08:33.254 If they can sell the charms to Johto 0:08:34.615,0:08:36.362 for something that is higher 0:08:36.362,0:08:38.190 than their opportunity cost, 0:08:38.190,0:08:40.719 and lower than Johto's opportunity cost, 0:08:40.719,0:08:42.335 then they both benefit. 0:08:42.335,0:08:44.041 And so a good price, let's say you could 0:08:44.041,0:08:45.403 go halfway between the two, 0:08:45.403,0:08:47.322 but it really could be[br]anything in between the two, 0:08:47.322,0:08:49.989 let's say 2.5 berries per charm. 0:08:54.653,0:08:56.136 They both benefit. 0:08:56.136,0:08:57.756 So they would trade at this, 0:08:57.756,0:09:00.339 trade at 2.5 berries per charm. 0:09:01.677,0:09:03.109 Why does this make sense for Johto, 0:09:03.109,0:09:05.081 even though they have[br]the absolute advantage? 0:09:05.081,0:09:08.852 Well if they produce nothing but charms, 0:09:08.852,0:09:12.351 it would cost them, or[br]no matter what they do, 0:09:12.351,0:09:14.595 it'll cost them three berries per charm. 0:09:14.595,0:09:17.076 But now they figured out[br]a way, through trade, 0:09:17.076,0:09:20.843 to get charms at two and[br]a half berries per charm. 0:09:20.843,0:09:24.817 And so this will be a[br]better deal for Johto. 0:09:24.817,0:09:26.533 And so one thing to appreciate 0:09:26.533,0:09:28.025 when we talk about comparative advantage, 0:09:28.025,0:09:29.260 some people think that it's about 0:09:29.260,0:09:31.491 one country benefiting[br]more than the other. 0:09:31.491,0:09:32.935 But if we assume all of the assumptions 0:09:32.935,0:09:36.027 about comparative advantage in our models, 0:09:36.027,0:09:38.344 then it's actually about both countries 0:09:38.344,0:09:39.795 that are trading benefit. 0:09:39.795,0:09:41.162 They will both be better off. 0:09:41.162,0:09:44.280 They will both get gains from trade, 0:09:44.280,0:09:46.613 and both will be better off.