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Main content
Current time:0:00Total duration:9:48
AP.MACRO:
MKT (BI)
,
MKT‑1 (EU)
,
MKT‑1.B (LO)
,
MKT‑1.B.1 (EK)
,
MKT‑1.B.2 (EK)
AP.MICRO:
MKT‑2 (EU)
,
MKT‑2.A (LO)
,
MKT‑2.A.1 (EK)
,
MKT‑2.A.2 (EK)
,
MKT‑2.B (LO)
,
MKT‑2.B.1 (EK)
,
MKT‑2.B.2 (EK)

Video transcript

the countries of Kalos and Johto can produce two goods shiny charms and berries yep you gotta love these worlds created in these economics questions okay the table below describes the production possibilities of each country in a day so here it tells us that Kalos if it puts all of its energy behind charms it could produce ten charms in a day but if it but all of its energy behind berries it could produce 20 berries in a day and then Johto all of its energy behind charms 25 all of its energy behind berries 75 given these numbers are based on both countries having the same labor and capital inputs who has the absolute advantage in charms so pause the video and see if you can figure this out alright so let's just remind ourselves absolute advantage is just as who is more efficient who given the same inputs can produce more and they told us that these countries they have the same labor and capital inputs so this is really just a question of who can produce more charms in a day and you can see very clearly that Johto can produce more charms in a day and I so I would say Johto because they produce let me write a little bit neater they produce more charms per day charms per day with same inputs same inputs so they are more efficient more efficient so they have the absolute advantage now this is an interesting thing because our intuition might say well whoever has the absolute advantage maybe they're the ones that should be producing charms but this is what's interesting when we study comparative advantage that that is not always the case and I suspect it this question will lead us there all right next next question they say calculate the opportunity cost in Kalos of charms so the opportunity cost in Kalos of charms so when Kalos decides to produce twenty ten charms they're trading off twenty varies or another way of thinking about it it costs them 20 berries to produce 10 charms so we could say it costs 20 berries for 10 charms which is equal to 2 berries to berries per charm in Kalos so there you have it the opportunity cost they trade off two berries per charm and actually let me make a little column here the opportunity cost so this is 2 varies per charm and I have a feeling and if you're taking an exam say an AP exam it's not a bad idea to just fill this thing out so what is the opportunity cost of they haven't asked us that yeah but I'm just gonna do it really fast what is the opportunity cost of of charms in Johto well they are trading off to produce 25 charms they they trade off 75 berries so this would be 75/25 this would be 3 varies per charm 75 berries for 25 charms is three berries per charm and if you want to know the opportunity cost of berries well you could just take the reciprocal of each of these so in Kalos the opportunity cost is one-half charms charms per vary and then in Johto it is one-third charms per berry then if they wanted to produce 25 berries if they wanted to produce 75 berries they would trade off 25 charms so it cost them 25 charms to produce 75 berries or 1/3 of a charm per berry so I'm just doing a little bit of extra but then it's going to be useful since the next question they actually are asking us who let me scroll up a little bit they're saying who has the comparative advantage in berries explained so berries whoever has the lower opportunity cost has the comparative advantage so we see here that Cotto has the lower opportunity cost in berries 1/3 is lower than 1/2 it's a lower opportunity cost of producing a berry so Johto has one third charms per barry opportunity cost opportunity cost which is lower than k Llosa's k Llosa's 1/2 charms per berry opportunity cost so Joe toe has comparative advantage so Joe toe has comparative comparative advantage in berries and I apologize a little bit for my penmanship I'm trying to save time by writing a little bit fast but hopefully me saying it out loud at the same time it's making it somewhat less legible all right so the next question if these countries were to specialize in trade who would who would produce which could explain well whoever has the comparative advantage each will produce that one so Kalos has comparative advantage Kalos has lower opportunity cost in in let's see they have the lower opportunity cost when you compare them to oh let me say let me put it this way for charms let me write it this way Kalos has a lower opportunity cost for charms Kalos has advantage in charms and then we already said Johto has advantage in berries and so Kalos or Kalos I keep saying it weird Kalos produces charms Johto produces berries produces berries and once again this goes back to something we touched on at the beginning of the video even though Johto has the absolute advantage in fact they have the absolute advantage in either Johto is not even though they can produce charms way more efficiently than Kalos jo tous is actually in this if you buy all the arguments of comparative advantages Johto should actually produce the berries while Kalos should produce the charms because they have a lower opportunity cost in terms of berries now let's answer this last question right over here what would be a trading price that Johto and Kalos would agree on to trade charms for now you might be saying well what's a price I'm used to saying saying that in terms of just you know maybe dollars or some type of currency how do I answer a price right over here well the key is is that we can give a price in terms of opportunity costs so they want a a price of charms so it really could be in terms of berries so let's see what let's look at each of their cost of charms so Cael OSes opportunity cost of a charm is two berries per charm Joe toes is three berries perch on so let me write rewrite that over here so Kalos Kalos opportunity cost of charms is two varies per charm and then Johto opportunity cost of charms is three berries per charm and here we're going to appreciate why comparative advantage works we said that Kalos would be the one that would focus on the charms and so notice if they can if they can sell the charms to Johto for something that is higher than their opportunity cost and lower than JoJo's opportunity costs then they both benefit and so a good price let's say you could go half way between the two but it really could be anything in between the two let's say 2.5 berries per charm they both benefit so they would trade at this trade at 2.5 berries for charm why does this make sense for Johto we even though they have the absolute advantage well if they produce nothing but but what if they produce nothing but charms it would cost them three berries per or no matter what they do it'll cost them three berries per charm but now they figured out a way through trade to get charms at two and a half varies per charm and so this will be a better deal for Johto and so one thing to appreciate when we talk about comparative advantage some people think that it's about one country benefiting more than the other but if you we assume all the assumptions about comparative advantage and well in our models then it's actually about both countries that are trading benefit they will both be better off they will both have they'll both get gains from trade and both will be better off
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