An average worker in Brazil can produce 30 mL of soy milk in 20 minutes and 30 mL of coffee in 6

An average worker in Brazil can produce 30 mL of soy milk in...

Key Concepts

Comparative Advantage

Comparative advantage is a fundamental concept in international trade which asserts that even if one country holds an absolute advantage in producing all goods, both countries can benefit from trade if they specialize based on lower opportunity costs. This concept emphasizes the benefits of specialization, where each country produces the goods for which they have a relatively lower sacrifice in terms of other goods.

Opportunity Cost

Opportunity cost represents the benefits an individual, investor, or country misses out on when choosing one alternative over another. In the context of trade, it is used to determine comparative advantage by comparing the sacrifice of not producing one product in order to produce another, highlighting the most efficient allocation of production resources.

Specialization

Specialization involves focusing the production process on a narrow range of tasks, products, or services in which an individual or country has a comparative advantage. This leads to increased efficiency and productivity, as repetitive tasks allow for skill enhancement and resource allocation is optimized.

Gains from Trade

Gains from trade occur when parties or countries benefit from exchanging goods and services, achieving consumption possibilities that are not attainable in domestic autarky. Through the economic principles of comparative advantage and specialization, trade allows each party to enjoy a higher standard of living than if they produced everything by themselves.

Absolute Advantage

Absolute advantage refers to the ability of a party, whether an individual or a country, to produce more of a good or service with the same amount of resources or to produce the same amount using fewer resources compared to another party. It is a measure of overall productivity and efficiency in production processes.

Transcript

00:01 Given these average capabilities of the workers in each country, we can decide who has the absolute advantage in coffee without doing any extra math.

00:09 So let's think about this.

00:11 So brazil can make 30 milliliters of coffee in 60 minutes, while peru can make 30 mils of coffee in 75 minutes.

00:19 So since it takes peru a longer amount of time to make the same amount of coffee, brazil has the absolute advantage.

00:27 So let's type that.

00:28 So absolute advantage in coffee.

00:34 It's given to brazil because they can make the same amount of coffee in less time.

00:47 Now, let's look at who has the comparative advantage in coffee.

00:51 And in order to do that, we're going to have to compute the opportunity costs of soy, making soy or coffee in each of these countries.

01:00 All right.

01:01 So let's start with brazil.

01:03 So in brazil, we can make 30 mils of soy milk in 20 minutes or the same amount of coffee in 60 minutes.

01:11 So in order to determine how much soy costs in terms of coffee, first we're going to determine how much milliliters we can make per minute, just to standardize each of these units, right? so 30 mils in 20 minutes, we can make three halves, just 30 over 20, or 1 .5 mils of coffee of soy per minute.

01:34 And then if we do the same thing with coffee, we do 30 mils over 60, we can make 0 .5 mills coffee per minute.

01:44 All right, so now that we have these numbers, what we're going to want to do is put soy in terms of coffee to determine the opportunity costs.

01:51 So how we do that is we say we can make 1 .5 soy, units of soy, in the same amount of time that we can make 0 .5 units of coffee.

02:02 Now if we want to know what one unit of coffee or what one unit of soy costs, all we do is divide both sides by 1 .5.

02:12 That way on the left side we'll have one unit of soy equals a certain amount of coffee.

02:17 Right? so if we divide both sides by 1 .5, we are going to get that one unit of soy is equal to one third unit of coffee.

02:29 All right.

02:30 And then if we do the same thing, if we just multiply both sides by three, we're going to get one unit of coffee on the right side.

02:37 Right? so if we have one unit of coffee and we multiply both sides by three, we're going to get that one unit of coffee equals three units of soy.

02:46 So these are our opportunity costs in brazil.

02:51 Now let's repeat this process over in peru.

02:54 Very similar things that we need to do.

02:57 All right.

02:57 So first let's standardize the mills of coffee or yeah, coffee and soy milk.

03:01 Right.

03:02 So if we do 30 milliliters over 50 minutes, we're going to get three fifths or point.

03:07 0 .6 mils of soy per minute.

03:13 And then at the same time, we can make 30 mils over 75 or 0 .4 mils of coffee per minute.

03:23 All right.

03:24 So then if we want to standardize and figure out what the opportunity cost of soy is, so we take in a minute we can either make 0 .6 units of soy or we can make 0 .4 units of coffee.

03:36 So once again, if we divide both sides by what we're trying to figure out, so by 0 .6 to get one unit of soy left on the left side, then you will find that one unit of soy is equal to two -thirds unit.

03:56 All right, and then if we multiply both sides by three halves to eliminate that fraction, we're going to get that one unit of coffee is equal to 1 .5 units of soy.

04:11 All right, so now, now we can determine who has the comparative advantage in coffee.

04:16 Right.

04:17 So how we do that is we look at what the opportunity costs of each good are.

04:25 Right.

04:25 So in brazil, we have that the opportunity cost of one unit of coffee, it costs us three units of soy...

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