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## AP®︎/College Macroeconomics

In this video, we explore how we can use opportunity costs to determine who has comparative advantage in producing a good. By specializing in the production of a good that a country has comparative advantage in, and trading for the other good, both countries have the potential to benefit from the exchange. We can also figure out a trading price (also known as the "terms of trade") which would make both countries willing to trade.

## Want to join the conversation?

• For A can produce: 1 pant=0.5 shirt(aka. o.c. of pants) So A wants to trade 1 pant for more shirts.
For B can produce: 1 pant=1.5 shirt(aka. o.c. of pants). So B wants to have the same amount of shirt(1.5 shirt) for less than 1 pant.
So to sell, I want the price higher than the o.c. of what I am selling.
To buy, I want the price lower than the o.c. of what I am buying.
• I get it now!if I want to sell, I will sell at a price more than i would have spent producing the good.
If I want to buy, I will need the price to be lower than what i would have spent if i produced it my own.
Don't know if I make sense.
• what's the difference between PPC and PPF? they seem quite the same to me
• In these videos, the terms have been used interchangeably.
• so you can only calculate O.C. if it is constant right? Or how would you calculate OC if it were increasing/decreasing?
• You can only calculate OC for an entire curve if it is constant. However, you can calculate OC if a PPC is increasing or decreasing, but you have to calculate it for each point on the curve. You can do this by:
* calculating the slope of a line tangent to that point
* estimate it by calculating the local tradeoffs (i.e., go to the next nearest point on the PPC and use that to calculate tradeoffs).
• I also do not get how at country A benefits by simply going to a range beyond PPF. Their absolute advantage on the pants significantly decreased trying to go to a point out of PPF. Does this mean a country benefits when they reach to a level out of the PPF even if the maximum production on one product significantly decreases?
• At ,Sal says country A will be willing to sell at price greater than the opportunity cost. Why would they do that? Wouldn't it be less beneficial if the opportunity cost goes up? Why do they not sell at the price lower than their opportunity cost so the comparative advantage will increase?
• I believe the idea is that country A/business A would be willing to trade/sell at a price greater than their opportunity cost so they would make a "profit". In other words if it costs a company \$3 to make a widget, they will be willing to sell the widget for some amount more than their cost of \$3 so they will make a profit.
• Given the information in video we know that price P for pants must be in the interval: (0.5 shoes for 1 pant, 1.5 shoes for one pant).
Does anybody know some kind of theory of finding the most optimal price for both countries. Does this price even exist?
• Why can't I replay a video once I already watched it? It would really help me during revision if you could fix this problem.
(1 vote)
• There's a replay button next to the little speaker icon. Click it and that should allow you to replay.
• well, in this video, sal has done calculations in terms of pants P. how would the trade look like when calculated in terms of shirts S instead?
• I did try applying the same idea in terms of pants; however country A seemed to not benefit from the trade when country B sells 5 shirts (for example). Here are some calculations.
<Market for Shirts>
B is willing to sell shirts to A for 0.7 pants or higher
A is willing to buy shirts from B for 2 pants or lower.
The price would be between 0.7<x<2. The median is 1.35.

Thus, B sells 1 shirt for 1.35 pants to A.

Correct me if I am wrong please.
(1 vote)
• There needs to be a summary. Either in the math or in the description (the math just making it easier/ the description just having a summary)