In Country A, the production of 1 bicycle requires using...

In Country $\mathrm{A}$, the production of 1 bicycle requires using resources that could otherwise be used to produce 11 lamps. In Country $B$, the production of 1 bicycle requires using resources that could otherwise be used to produce 15 lamps. Which country has a comparative advantage in making bicycles? $L O 38.2.$ a. Country A. b. Country B.

Key Concepts

Comparative Advantage

Comparative advantage is the ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than others. This concept underpins the benefits of specialization and trade, suggesting that even if one entity is less efficient in producing all goods (absolute disadvantage), there can still be mutual gains from trade if each specializes in what they produce relatively more efficiently.

Opportunity Cost

Opportunity cost represents the value of the next best alternative that must be forgone when a choice is made. In economics, it is a critical concept that helps determine what is sacrificed when resources are allocated to produce one good instead of another, thereby influencing production decisions and trade-offs.

Transcript

00:01 Comparative and absolute advantages are helpful when analyzing trade deals.

00:04 So let's look at the pps for both us and canada.

00:08 So just a rough sketch for both of them.

00:10 We have here's the us and then here's canada.

00:18 So we're told that each of these countries makes the same two goods.

00:23 So we're going to put boots on the x -axis and shirts on the y -axis.

00:34 All right.

00:36 So these graphs are given to us, but i'm going to draw them so we can.

00:39 Play with the questions and look at the answers graphically.

00:43 Okay, so we're told that the us, this is that function.

00:47 They, actually, i'm going to draw it a bit steeper.

00:50 So we have like that, there we go.

00:53 So the maximum amount of shirts they can make is 12.

00:55 If they make no boots.

00:57 And then if they make no shirts, they can make four boots.

01:01 And then for canada, they can make six of each if they don't make the other.

01:07 Right.

01:07 So there looks much more even, just like that.

01:10 All right.

01:11 So the first thing to look at is comparative advantage.

01:13 So how we're going to do that, i'm going to scroll down a bit, is what you want to do is look at how many total amount of shirts and boots each country can make.

01:23 Right.

01:23 So the u .s.

01:24 Can make 12 shirts and four boots.

01:28 So we want to put that in terms of one another because the opportunity of making 12 shirts is what? it's four boots, right? so for every 12 shirts, we lose four boots.

01:43 So if we want to find out what the opportunity cost of making one shirt is, we simply divide four over 12.

01:50 Right.

01:51 And that's going to give us one third.

01:53 So the opportunity cost of one shirt is one third boot.

02:00 And then if we do the same thing over here, if we divide 12 by four, we get the opportunity cost of one boot is going to be three shirts.

02:09 Okay, so that's for the u .s.

02:13 Now let's take a look at canada.

02:15 So canada's pretty easy.

02:17 You, since we have six total of each that you can make if you don't produce the other one, right? so we have six shirts and six boots.

02:28 So for every six shirts that you make, you lose six boots.

02:36 So that means that the opportunity cost of one shirt is going to be six divided by six, which is just one.

02:46 Right.

02:47 And then the opportunity cost of one boot is the same because six divided by six is still one.

02:53 Okay, so what we want to look at in comparative advantage is see which nation has a lower opportunity cost for each good.

03:00 Let's look at shirts.

03:01 So for every one shirt that we make, we lose one third boot.

03:06 Over here in canada, for everyone's shirt that we make, we lose one whole boot...

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