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### Course: Microeconomics > Unit 1

Lesson 4: Comparative advantage and the terms of trade- Comparative advantage, specialization, and gains from trade
- Comparative advantage and absolute advantage
- Opportunity cost and comparative advantage using an output table
- Comparative advantage and absolute advantage
- Terms of trade and the gains from trade
- Input approach to determining comparative advantage
- When there aren't gains from trade
- Comparative advantage worked example
- The terms of trade

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# Input approach to determining comparative advantage

In this video, we take a slightly different approach to determining comparative advantage because we are given data in a slightly different way. Rather than knowing how much of two goods can be produced in a day, we know how much of a resources (in this case labor) is needed to produce one unit of a good.

## Want to join the conversation?

- At6:52you say multiply both sides by 3/8. Why do you do that?(2 votes)
- 2c = 8/3b

He's actually dividing 8/3. And what do you do to divide fractions? As one of my math teachers use to say, flip it and change it! 8/3 becomes 3/8 and division because multiplication. That's why he's multiplying by 3/8, he did the "flip it and change it" in his head.(21 votes)

- Lol the cold below/above the waist thing(8 votes)
- How do you determine the optimal trade for both counties?(5 votes)
- The video before this "Terms of trade and the gains from trade" explains this.(3 votes)

- How does using the amount of labor required to produce one unit of a good help us determine comparative advantage in a different way?(3 votes)
- Using the amount of labor required to produce one unit of a good helps determine comparative advantage by showing the relative efficiency of production between two entities. By calculating how much of one good must be forgone to produce another (the opportunity cost), we can determine which entity has a comparative advantage. This method focuses on the input (labor hours) required rather than the output, providing a different perspective on efficiency and comparative advantage. It emphasizes the cost side of production, which is crucial for understanding where comparative advantage lies.(2 votes)

- When solving for the Opp Cost, I was doing it in decimals and had the cost for B to make Belts be 2/2.6=.769. However, Sal ends up with 3/4 which is .75. What approach would be most exact, and what is most likely to be the system used on a college Econ Placement test? Fractions or Decimals?(1 vote)
- When solving for opportunity costs, both fractions and decimals can provide accurate results. However, fractions are often more precise and can offer clearer insights into the exact trade-offs involved in production decisions. Decimals may sometimes require rounding, which can introduce small errors in calculation. In academic settings, including college econ placement tests, it's common to use fractions for these reasons. They convey the precise ratios without the need to round off, making them preferable for theoretical analysis. However, understanding how to work with both forms is important, as real-world applications may necessitate using decimals for practical reasons.(3 votes)

- at6:56im so confused by the 3/8 x 2c=8/3b x 3/8

i understand the flip and change rule for dividing fractions but i dont know why he did the "times 3/8" at the end(2 votes)- dividing x/
**y**by x/**y**is same as multiplying x/**y**by**y**/x. Instead of diving both sides by x/y he just multiplying by the inverse fraction.(1 vote)

- Hi everyone! Could someone enlighten me on this please? Thank you sm :)

"How can country B have the comparative advantage in toy cars even though country A has the absolute advantage (more efficient in its production) because of opportunity cost?"(1 vote)- In absolute advantage, we deal with one product. But in Comparative Adv we count other product too. Suppose, A produces 3 belts 3 cars. But B produces 5 belts and 15 cars. Now OC for B is 1 belt = 3 cars, if B could produce 10 cars then OC is 1b= 2c . Now look B has always absolute Adv in belt(5>3) but its Comparative Adv is changing with the number of another product(car) it can produce and we have to compare it to the OC of country A. Thus we decide Comparative adv.(2 votes)

- Why does it make sense for an entity to specialise in producing a good that they have a comparative advantage in? Especially given that in the real world goods don't have equal value(1 vote)
- Specializing in a good that an entity has a comparative advantage in makes sense because it allows for the most efficient allocation of resources. By focusing on goods for which they have the lowest opportunity cost, entities can trade for other goods at a lower cost than producing them domestically. This leads to an increase in overall production and consumption possibilities for all parties involved. Even if goods don't have equal value, specializing and trading based on comparative advantage allows each entity to gain more of the goods they value through trade than they could by producing everything domestically.(1 vote)

- country A has C.A in toy cars

2b < (8/3)b(0 votes)- There seems to be a misunderstanding in your conclusion from the explanation. Country A does not have the comparative advantage (C.A) in toy cars based on the calculation of opportunity cost; it's actually country B that has the comparative advantage in toy cars. Comparative advantage is determined by who has the lower opportunity cost in producing a good, and as explained, country B has a lower opportunity cost (1 1/3 belts for a car) compared to country A (2 belts for a car). Therefore, country B has the comparative advantage in toy cars.(1 vote)

## Video transcript

- [Instructor] In other videos we have already looked at
production possibility curves and output tables in order to calculate opportunity costs of
producing a certain product in a certain country. And then we used that to think
about comparative advantage. We're going to do something
very similar in this video, but instead of thinking about, or instead of starting with output, we're gonna start with input. So right over here we have a table that shows us the worker
hours per item per country. So, instead of this being an output table where we say in a given country, how much of, say, toy cars can a worker in country A produce per day? Here we're saying, how
many hours does a worker in country A take to produce A toy car? In country A it is two hours. That labor, that two hours
of labor, this is the input. So we're not counting the
number of cars per day here. We're saying how many hours per car, A, we need to put in to produce it. Similarly, we have the
input required in country A to produce a belt. One hour of worker time. In country B, four hours of worker time produces a toy car. And in country B, three
hours of worker time produces a belt. So what we're gonna do
next is convert this into the world that you
might be more familiar with, of thinking in an output world. And to do that, we'll
just assume that there are eight working hours per day in either country. And so from this, can we
construct an output table? Let me put this right over here. Output table, where once again we're gonna think about the output in country A. We're gonna think about
the output in country B. And this is going to be in how many units of that
product can a worker produce per day in each of those countries? So once again, we're gonna
have toy cars in this row, and we're going to have belts in this row. And let me just draw
some lines so it's clear that we're dealing with a table here. So there we go. Then one more column. And so, see if you can fill these in. So how many toy cars per worker per day can we produce in country A? Then think about it for belts. Then think about both
of them for country B. Pause the video and
try to figure that out. Alright, now let's think about how many toy cars per worker per day. Let me make it very clear. We're thinking per worker per day here. Because if we can fill out
this output table from this, I guess you could call
this an input table, then we can think about opportunity cost in the traditional way. And then we could think
about in which country do we have a comparative advantage? So, let's see. Toy cars in country A. If it takes two hours
to produce one toy car in country A, and if you're working, if
the average, or if the worker is working eight hours per day, well then, a worker can produce four cars. Four cars times two hours is eight hours. So, an average worker per day in country A can produce four toy cars. Let me write than in that red color. Four toy cars. I just took eight hours and I divided by the number of hours it
takes to produce a toy car. Similarly for belts, if I have eight hours and it takes an hour for
a worker to make one belt, then per worker per day,
eight divided by one, I could produce eight belts. And we could do the same
thing for country B, and I encourage you to pause the video if you haven't done so already and try to fill this column out. Well, in country B, if it takes four hours to produce a toy car per worker, that means you take eight
hours divided by four hours that you could produce two
toy cars in a day per worker. If it takes three hours to produce a belt, well then you take your eight hours, divide it by three hours per belt, and you're gonna be able to make 8/3 belts per worker per day. This is the same thing as 2 2/3 belts per worker per day. So as you can see, we can easily translate between the input world
and the output world. And then we could use this to
calculate opportunity cost. So let's do that. Let me write opportunity cost. And I'll make another table here. So country A, country B, and then I have the toy cars, and then I have the belts. Let me do the belts in that orange color. I have the belts, and then let me set up my table. We're almost there. At any point in time, pause this video and see if you can figure out the opportunity cost
given the information that we already have. We took this table to
figure out this table, and now we could take this table to figure out this one. Well, let's do this together now. So, toy cars. What's the opportunity cost in country A? Well, one way to think
about it is in country A, the same energy to produce four toy cars, I'll call it four c, c for cars. We could also use that
to produce eight belts. So, if I were to divide
both sides by four, the energy to create one car is equal to the energy to create two belts. So my opportunity cost of a car is two belts. And if I start with this original equation and just divide both sides by eight, I would solve for the energy for a belt. And so that would be four over eight is 1/2 of the energy to make a car is equal to the energy to make a belt. And so the opportunity cost
of a belt is 1/2 a car. 1/2 a car. And like always, this and this are
reciprocals of each other. And we could do this same
exercise for country B. And once again, I keep emphasizing, try to pause the video. If you do this on your own as opposed to just watching me do it, it'll stick a lot better in your brain. Alright, in country B, the same energy to make two cars, toy cars, with that same energy
I could make 8/3 belts. 8/3 belts right over here. So the energy to make a car, divide both sides by two, is equal to, instead of one
car I can make 4/3 of a belt. And so I'll just write
this as 1 1/3 of a belt. And then if I start right over here and I multiply both sides by 3/8, actually, let me do that over here. So I have 3/8 times two c is equal to 8/3 b times 3/8. These cancel out. And over here I'm gonna have 6/8 c. 6/8 c is the same thing
as 3/4 c is equal to b. So, instead of making one belt, I could take that same energy
and make 3/4 of a toy car. 3/4 of a toy car. So given everything that we've just done, which country has the
comparative advantage in toy cars? Well, to figure that out, we just look at the
opportunity cost for toy cars and we compare them. In country A, the
opportunity cost is two belts while in country B it's only 1 1/3 belts. So country B has the comparative
advantage right over here. Comparative advantage in toy cars. And then in belts, 1/2 of a car is less than 3/4 of a car. In belts, we see that country A has the comparative advantage. And now what's always interesting about thinking about this is notice, country B has the comparative advantage in toy cars. It has less of an
opportunity cost in toy cars. Even though country A has
the absolute advantage, its workers are more efficient
at producing toy cars. A worker can produce
four cars in country A versus two in country B. But despite that, because
of the opportunity cost, it would actually make sense for country B to focus on cars and for country A to focus on the belts. But the big picture here is we're thinking about
comparative advantage. And instead of thinking
about with an output lens from the beginning, we
started with an input lens, converted that to an output lens, calculated opportunity cost, and then was able to figure out which countries had a
comparative advantage in which products.