[00:00.00]Listen to part of a lecture in an economics class. The professor has been talking about international trade.
[00:08.03]Professor: OK, so let's recap from yesterday. Why do nations engaged in international trade? [00:14.90]Well, it's often because of a surplus, more than they need, and they also trade for the opposite reason when they have shortages and can't produce everything they want or need domestically. [00:29.90]So these explanations are good as far as they go. But there's another scenario we need to discuss. [00:37.62]And that is what if a country is capable of producing something it wants or needs but it can also import the same product from another country? [00:48.33]Now, how does the country decide whether to make the product itself or import it? [00:54.20]OK, take an example. Um, think about the bananas that you buy in the supermarket. [01:00.20]If you look closely, you'll see that most bananas in the United States are imported, imported from countries with tropical climates. [01:07.95]But the United States has warm regions. It has greenhouse. Clearly, it would be possible to grow bananas here. So why doesn't the US do that? Scott?
[01:18.82]Student Scott: Well, it is like a lot cheaper and more efficient for countries with tropical climates, for tropical countries to grown bananas, isn't it? [01:26.10]I mean, they don't need greenhouse to grow bananas, and they're not so limited to certain regions.
[01:31.49]Professor: Okay, good. That's exactly right. Tropical countries have what we call an absolute advantage in producing bananas. [01:39.78]Absolute advantage is the term we use when a country can produce more of a product using fewer resources. They're the most efficient producer of something. [01:50.36]And the United States can't be that with bananas. So it's better off specializing in other goods that it can make more efficiently. [01:58.36]Let's take an example, say we have two countries and say they each make only two products and they trade only with each other. [02:08.65]Simplistic I know. But well, you'll see where I'm going with this in a moment. [02:13.86]OK, so as I was saying, two countries, two products, one country can produce both products more efficiently than the other country. Should these two countries even trade at all?
[02:26.45]Student Scott: Uh, well, no, I mean, like what's in it for the more efficient country?
[02:32.97]Professor: Well, what is in it for them? Let's, um, well, let's call these countries um, X and Y. [02:41.62]Country X makes both TVs and chairs more efficiently than country Y does. It has an absolute advantage in producing both commodities? No question. [02:53.06]But what economists also look at is relative efficiency. [02:57.80]And from that perspective, we see that country X is a lot more efficient at making TVs than it is at making chairs and in country Y, ah, well, it turns out they're more efficient at making chairs than TVs. [03:14.06]So we say that country Y has a comparative advantage at chair making. And country X has a comparative advantage at TV making. [03:26.07]So what should happen? Well, first, both countries should specialize in the production of just one thing. The product they're most efficient at making. [03:36.18]Country X should make only TVs and country Y should make only chairs, then two of them should trade. [03:43.79]Specialization and trade are going to lead to increase in production and increased overall supply of goods and generally lower prices. Right?
[03:54.59]Student Scott: Professor, I still don't see how countries figure out when and where they have a comparative advantage.
[04:01.75]Professor: Well, you can't fully understand the concept of comparative advantage without also considering the related concept of opportunity cost. [04:12.98]Opportunity cost is what you lose, uh, the options you have to give up in order to use your time and resources for something else, countries can determine where their comparative advantages lies, uh, like making TVs instead of chairs by figuring out what they can make with the lowest opportunity cost. [04:34.42]Ah, you know, maybe this will be clear if we apply it on a personal level. [04:39.06]Now think about when you go out to a movie, your direct monetary cost is the price of the movie ticket. Right? [04:45.65]But you also spend two hours at the theater. [00:00.00]Your opportunity cost includes both, uh, whatever else you could have spent your money on. [04:55.76]Um, ten candy bars may be and whatever else you could have accomplished during the time you were watching the movies, uh, you might have completed your homework for this class, or you might have work two hours overtime at your job, thereby earning instead of spending money. [05:11.60]See, these lost possibilities are your opportunity cost.
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