The following table describes the production possibilities...

The following table describes the production possibilities of two cities in the country of Baseballia: a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the price in Chicago? b. Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock? c. If the cities trade with each other, which color sock will each export? d. What is the range of prices at which trade can occur?

The following table describes the production possibilities of two cities in the country of Baseballia:
a. Without trade, what is the price of white socks (in terms of red socks) in Boston? What is the
price in Chicago?
b. Which city has an absolute advantage in the production of each color sock? Which city has a comparative advantage in the production of each color sock?
c. If the cities trade with each other, which color sock will each export?
d. What is the range of prices at which trade can occur?

Key Concepts

Production Possibility Frontier (PPF)

The production possibility frontier represents the maximum possible combinations of two goods that an economy can produce given its limited resources and technology. It illustrates the trade-offs and opportunity costs involved in the production of one good versus another, and helps determine the efficiency and potential production capability of an economy.

Opportunity Cost

Opportunity cost is the value of the next best alternative that is forgone when a choice is made. In the context of production and trade, it represents how much of one good must be sacrificed in order to produce an additional unit of another good, serving as a fundamental concept in determining comparative advantage.

Absolute Advantage

Absolute advantage refers to the ability of an economic agent or entity to produce a good using fewer resources than others. It is a measure of productivity; if one city can produce more of a good with the same or fewer resources than another, it has an absolute advantage in that production.

Comparative Advantage

Comparative advantage is the ability of an economic agent to produce a good at a lower opportunity cost than another. It forms the basis for mutually beneficial trade, as entities can specialize in producing goods where they have the lowest relative sacrifice, even if one party holds an absolute advantage in all goods.

Terms of Trade

Terms of trade refer to the ratio at which goods are exchanged between trading partners, reflecting the relative prices of the traded goods. In international or regional trade, the acceptable range of exchange rates ensures that both parties can benefit from trade by obtaining goods at a relative cost lower than if they produced the goods themselves.

Transcript

00:01 This example is walking us through trade gains and how about we get to achieving trade gains.

00:08 And particularly, we're going to be using opportunity costs, absolute and comparative advantages.

00:13 Let's start with part a here and it's asking us in a situation of no trade between boston and chicago here, what is the price of white socks in terms of red socks for each of these? so we can see by looking at this table, it looks like boston has the same production possibilities for each of these two colored socks, which means that in order for them to produce one pair of white socks, it's going to cost them one pair of red socks.

00:38 Chicago, on the other hand, does not have the same production possibilities for each of these colored socks.

00:43 But we do see that they can produce that one pair of white socks in an hour and two pairs of red socks in an hour, which gives us their cost of that one pair of white socks.

00:53 Now, part b is asking us to find these absolute and comparative advantages.

00:57 So let's start with these absolute advantages.

00:59 And we know that absolute advantages is just, it's asking us which city here can produce more of each commodity within an hour.

01:07 And it looks like boston has the absolute advantage in both of these colored socks.

01:12 You can see that they can produce more pairs per worker per hour than chicago can in both of these colored socks.

01:19 Now looking at the comparative advantage, what we have to do is get away from these absolute advantages.

01:25 We're not looking just at the production possibilities, but we're looking at.

01:29 Their opportunity costs.

01:31 And that's essentially what we just did in part a by calculating the cost of one white sock or one pair of white socks.

01:38 So we can see that for boston, to produce one pair of white socks, it costs them one pair of red socks.

01:44 And that's their opportunity cost of producing that one pair of white socks.

01:48 Chicago, on the other hand, has an opportunity cost of producing one pair of white socks, which is equal to two pairs of red socks...

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