Economics

BBA 2501 Unit I Ch 2 Law of Comparative Advantage

00:00:00 Hello class, we're gonna be talking about the law of comparative advantage here.

00:00:08 Think back in time, when the United States was first founded, travel was very limited.

00:00:15 Paul Revere his famous Midnight Ride Was from Boston, Massachusetts to Lexington, Massachusetts.

00:00:21 That's only about 13 miles.

00:00:24 He left at 10pm on April the 18th and did not arrive until shortly after midnight on April the 19th.

00:00:33 That's over one day to ride just 13 miles.

00:00:40 When trains and automobiles were invented, people became more mobile.

00:00:44 We could move around more.

00:00:47 Then we took to the sky, and traveling across the entire nation or even across the ocean became a real possibility for all of society.

00:00:59 Well, the same holds true for buying and selling goods and services.

00:01:04 Transportation by foot or by horse meant that you bought and sold goods and services very, very close to home.

00:01:12 Train and automobiles meant you could buy and sell goods from much, much, much further distances.

00:01:21 Airplanes, well, that brought on the ability to buy and sell goods from across the nation and anywhere around the world.

00:01:30 And then we had the good old internet invented.

00:01:32 Now with the click of a button you can purchase something from the other side of the globe and have it on your doorstep within a day or two.

00:01:43 Now, let's think about competition in choices.

00:01:47 Our ability to sell goods and services around the world creates a lot of competition 100 years ago, competition was from maybe one or two other stores within walking distance.

00:02:02 Today, competition comes from these same two stores, but also every other store that's located anywhere in the world.

00:02:13 Our ability to purchase goods and services from anywhere around the world creates choices for us.

00:02:19 Just google any good and see how many thousands of hits you're gonna get.

00:02:27 Competition, think about that word.

00:02:30 It really is trying to determine who is better.

00:02:34 Competition in any form means that someone is better than another.

00:02:41 Think about all these champions that were crowned in the year 2019.

00:02:45 Joey Chestnut, well, he ate 71 hot dogs in 10 minutes to win Nathan's Hot Dog Eating contest.

00:02:53 Scamp, well, Scamp won World's Ugliest Dog contest.

00:02:58 Rob Messel, won the Air Guitar World Championships.

00:03:02 And Ian Ashmeade won the World Pea Shooting contest.

00:03:09 All of these champions faced competition whenever they won.

00:03:13 So competition is all around us, and the same holds true for business.

00:03:21 Winning in economics is determined by profits and market share.

00:03:27 Profits are directly tied to the cost of production.

00:03:32 So the cost of production well, that includes all expenses where money is actually spent.

00:03:38 That would be on buildings, machinery, labor, capital, things like that.

00:03:44 And the cost of production though also includes opportunity costs.

00:03:48 Remember that from the opportunity costs video.

00:03:52 That means that lowering cost is one element to winning in economics.

00:04:01 So how does all of this relate to the law of comparative advantage?

00:04:05 Well, this law suggests that specialization should be done by an individual firm, a region, or country with the lowest opportunity cost of production.

00:04:20 In other words, a firm region or country that has the lowest opportunity cost of producing a good, well, that country should just go on ahead and focus on producing that good and let someone else produce other things.

00:04:36 Take a look at any label for any product that's lying around you right now.

00:04:43 It's gonna tell you who has the lowest opportunity cost.

00:04:47 For instance, here's a bottle of my wife's dry shampoo.

00:04:53 The United States of America is where this is made.

00:04:56 Well that tells us that the US has the lowest opportunity cost for producing that dry shampoo.

00:05:05 Indonesia's opportunity costs for producing my wife's business jacket is lower than anywhere else in the world, notice it's made in Indonesia.

00:05:16 Dr. Pepper, well, it's made in Plano, Texas.

00:05:20 And so the lowest opportunity cost for producing Dr. Pepper is right in Plano, Texas.

00:05:28 Let's look at international trade.

00:05:30 International trade is based on the law of comparative advantage.

00:05:36 In fact, comparative advantage is the very basis of international trade.

00:05:45 If one nation has a comparative advantage, in other words, it has the lowest opportunity cost, that nation should focus on producing the good with the lowest opportunity cost.

00:06:00 Here we've been talking about televisions.

00:06:03 If one nation has the lowest opportunity cost for producing televisions, that nation should produce televisions.

00:06:12 If another nation has a comparative advantage or the lowest opportunity cost for producing cars, that nation should focus on producing cars.

00:06:23 Then this two nations can trade televisions for cars, and everyone is going tobe better off.

00:06:32 Let's look at the scenario.

00:06:34 You probably saw this and remember this back from the opportunity cost video.

00:06:38 An American worker and Canadian worker can each produce one television per month, or an American worker can produce two cars per month.

00:06:47 And a Canadian worker can produce one car per month.

00:06:53 Here we have before trade.

00:06:56 This is a table that shows before trade with each nation trying to produce both.

00:07:03 Well, if the Canadian workers are gonna try and produce Both televisions and cars.

00:07:09 They can produce a half of television and a half of a car.

00:07:14 Cuz remember, they can produce one television or one car.

00:07:19 So if they're trying to produce both of them, then they can produce a half of each.

00:07:25 The American worker, they can produce a half of a television or one full car.

00:07:32 The total production worldwide if neither of these countries is specializing, one television would be made worldwide per month and one and a half cars would be made.

00:07:46 Now let's look at the opportunity cost.

00:07:50 We need to determine this opportunity cost of producing one television or producing one car for each country.

00:08:04 If the Canadian worker if they wanna produce one television, they're gonna sacrifice or give up producing one car.

00:08:15 If the Canadian worker wants to produce one car, they're gonna have to sacrifice one television.

00:08:22 Those are the opportunity cost there.

00:08:25 The American worker would sacrifice two cars to produce one television or a half of a television to produce one car.

00:08:36 Interpretation here, the Canadian worker has the lowest opportunity cost for producing televisions and the American worker has the lowest opportunity cost for producing cars.

00:08:52 The American worker should focus on producing only cars because they have the lowest opportunity cost.

00:09:00 The Canadian worker could then focus on producing televisions because they had the lowest opportunity cost of producing televisions.

00:09:10 Here we have a table that shows what happens with specialization.

00:09:15 The Canadian worker would produce one television and zero cars.

00:09:21 The American worker produces zero televisions and two cars.

00:09:27 Total with specialization is we have one television produced and two cars.

00:09:34 Now remember back without specialization, we had one television produced, but we only had one and a half cars produced without specialization.

00:09:45 That means that by letting these nations, focus on doing what they do best we gain a half a car production every single month.

00:09:59 Luna I'd like to share with you some of the highlights that we've covered in this video.

00:10:04 First with specialization production is increased.

00:10:09 With specialization, nations can trade and everyone's gonna be better off.

00:10:17 Now every time you look at a label and it says made in whatever country, think comparative advantage.

00:10:26 And also Luna would like to know if anybody's seen that cat, she still wants to chase that cat.

00:10:35 I do appreciate you watching this video, here's a reference make sure you know you look at the textbook that we're using for the class.

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