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- [Instructor] The
countries of Kalos and Johto

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can produce two goods.

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Shiny charms and berries.

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Yep, you got to love these worlds

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created in these economics questions.

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The table below describe the production

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possibilities of each country in a day.

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So here it tells us that Kalos,

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if it puts all of its
energy behind charms,

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it can produce 10 charms in a day.

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But if it put all of its
energy behind berries,

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it can produce 20 berries in a day.

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And then Johto, all of its energy

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behind charms, 25, all of its
energy behind berries, 75.

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Given these numbers are
based on both countries

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having the same labor and capital inputs,

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who has the absolute advantage in charms?

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So pause the video and see
if you can figure this out.

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All right, so let's just remind ourselves.

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Absolute advantage is just
who is more efficient?

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Who, given the same
inputs, can produce more?

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And they told us that these countries,

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they have the same labor
and capital inputs,

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so this is really just a question

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of who can produce more charms in a day?

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And you can see very clearly that Johto

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can produce more charms in a day.

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And so I would say Johto,

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because they produce, let me write

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that a little bit neater,

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they produce more charms per day.

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Charms per day.

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With same inputs.

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Same inputs.

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So they are more efficient.

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More efficient.

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So they have the absolute advantage.

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Now this is an interesting thing,

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because our intuition might say

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well whoever has the absolute advantage,

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maybe they're the ones that
should be producing charms.

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But this is what's interesting when

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we study comparative advantage.

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That is not always the case.

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And I suspect that this
question will lead us there.

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All right, next question.

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They say calculate the opportunity cost

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in Kalos of charms.

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So the opportunity cost,
in Kalos, of charms.

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So when Kalos decides
to produce 10 charms,

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they're trading off 20 berries.

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Or another way of thinking about it,

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it costs them 20 berries
to produce 10 charms.

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So we could say it costs 20 berries

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for 10 charms, which is
equal to two berries,

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two berries per charm, in Kalos.

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So there you have it.

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The opportunity cost, they trade off

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two berries per charm.

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And actually, let me make
it a little column here.

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The opportunity cost.

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So this is two berries per charm.

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And I have a feeling, and if you're taking

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an exam, say an AP exam,
it's not a bad idea

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to just fill this thing out,

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so what is the opportunity cost,

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they haven't asked us that yet,

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but I'm just gonna do it really fast.

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What is the opportunity
cost of charms in Johto?

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Well, they are trading
off, to produce 25 charms,

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they trade off 75 berries.

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So this would be 75 divided by 25,

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this would be three berries per charm.

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75 berries for 25 charms
is three berries per charm.

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And if you want to know the
opportunity cost of berries,

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well you can just take the
reciprocal of each of these.

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So in Kalos, the opportunity cost

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is one half charms, charms per berry.

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And then in Johto, it is
one third charms per berry.

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That if they wanted to produce 25 berries,

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if they wanted to produce 75 berries,

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they would trade off 25 charms.

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So it would cost them 25
charms to produce 75 berries,

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or one third of a charm per berry.

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So I'm just doing a little bit of extra.

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But then it's gonna be useful,

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because in the next
question, they actually

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are asking us, who, we'll
scroll up a little bit.

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They're saying who has
the comparative advantage

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in berries, explain.

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So berries, whoever has
the lower opportunity cost

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has the comparative advantage.

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So we see here that Johto has the lower

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opportunity cost in berries.

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One third is lower than one half.

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It's a lower opportunity
cost of producing a berry.

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So Johto has one third charms

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per berry opportunity
cost, opportunity cost.

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Which is lower than Kalos',

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Kalos' one half charms per
berry opportunity cost.

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So Johto has comparative advantage.

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So Johto has comparative,

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comparative advantage in berries.

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And I apologize a little
bit for my penmanship,

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I'm trying to save time by
writing a little bit fast,

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but hopefully me saying it
out loud at the same time

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is making it somewhat legible.

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All right.

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So the next question.

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If these countries were
to specialize in trade,

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who would produce which good, explain.

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Well whoever have the
comparative advantage

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of each will produce that one.

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So Kalos has comparative advantage,

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Kalos has lower opportunity cost in,

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in let's see, they have
the lower opportunity cost

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when you compare them to, oh let me see,

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let me put it this way.

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For charms, let me write I this way,

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Kalos has a lower
opportunity cost for charms.

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Kalos has advantage in charms.

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And then we already said Johto

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has advantage in berries.

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And so, Kalos, I keep saying it weird,

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Kalos produces charms,

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Johto produces berries, produces berries.

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And once again, this goes back

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to something we touched on at
the beginning of the video.

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Even though Johto has
the absolute advantage,

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in fact they have the
absolute advantage in either,

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Johto is not, even though they can produce

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charms way more efficiently than Kalos,

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Johto is actually in this, if you buy

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all the arguments of
comparative advantages,

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Johto should actually produce the berries,

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while Kalos should produce the charms,

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because they have a lower opportunity cost

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in terms of berries.

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Now let's answer this last
question right over here.

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What would be a trading price that Johto

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and Kalos would agree
on to trade charms for?

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Now you might be saying,
well what's a price,

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I'm used to saying that in terms

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of just maybe dollars or
some type of currency,

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how do I answer a price right over here?

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Well, the key is that we can give a price

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in terms of opportunity cost.

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So they want a price of charms.

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So it really could be in terms of berries.

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So let's see.

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Let's look at each of
their cost of charms.

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So, Kalos' opportunity costs of a charm

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is two berries per charm,

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Johto's in three berries per charm.

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So let me rewrite that over here.

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So Kalos, Kalos opportunity cost of charms

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is two berries per charm.

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And then Johto opportunity cost of charms

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is three berries per charm.

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And here we're going to appreciate

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why comparative advantage works.

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We said that Kalos would be the one

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that would focus on the charms.

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And so notice.

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If they can sell the charms to Johto

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for something that is higher

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than their opportunity cost,

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and lower than Johto's opportunity cost,

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then they both benefit.

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And so a good price, let's say you could

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go halfway between the two,

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but it really could be
anything in between the two,

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let's say 2.5 berries per charm.

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They both benefit.

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So they would trade at this,

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trade at 2.5 berries per charm.

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Why does this make sense for Johto,

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even though they have
the absolute advantage?

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Well if they produce nothing but charms,

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it would cost them, or
no matter what they do,

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it'll cost them three berries per charm.

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But now they figured out
a way, through trade,

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to get charms at two and
a half berries per charm.

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And so this will be a
better deal for Johto.

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And so one thing to appreciate

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when we talk about comparative advantage,

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some people think that it's about

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one country benefiting
more than the other.

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But if we assume all of the assumptions

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about comparative advantage in our models,

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then it's actually about both countries

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that are trading benefit.

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They will both be better off.

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They will both get gains from trade,

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and both will be better off.