Thursday, May 26, 2022

Economics of Trade – Comparative vs Absolute Advantage

Alright ladies and gentlemen welcome to another exciting lecture for international business and today we're going to take a look at the little economics and breakdown comparative versus absolute advantage this is really going to help us explain exactly why countries trade with who they do or why they trade period so make sure you get .

Out your notes you follow the storm philosophy sit back and enjoy so let's take a look at what we're going to achieve today we're going to identify again why countries trade revisit those benefits that we looked at before we're in identify opportunity costs and this is really what lays the foundation for the rest of our discussion then .

We're going to compare compare to the Venge then absolute advantage and then take a look at real-life how does this play out so why trade remember these from before our previous lecture the benefits of international trade will also do with increasing consumer choice and satisfaction improving the standard of living and hopefully the path to .

World pieces through trade and for many countries this is exactly what happens but for some countries they might find it difficult to trade they may not be able to find a dancing partner but guess what everyone can find a dancing partner everyone can trade and we're going to identify that today take care of for instance why the heck would Canada trade .

We have chemicals and plastics we have lumber and wood pulp and paper we have telecommunications devices we have auto parts we have aviation and aerospace we have machinery and equipment we have oil we have all sorts of useful useful goods that we can really use to our advantage so do we not have everything can we not provide for every single citizen and can .

Well the answer is yes but so does the state so does Japan so does Great Britain reuniting in France in Mexico and Germany and China and even the Netherlands all these countries have these things just like we do so why do we trade why do we trade with all these countries if they have what we have and they are just well-off as we are well .

The answer is quite simply economics so let's take a look now so it all boils down to opportunity cost what do you give up when you partake in a certain action so if Canada is going to produce all of these goods what are they giving up for yourselves take for instance you sitting at home watching this lecture video what else could you be doing maybe .

You could be working instead you wanted to really sit down and watch this lecture video maybe could be out socializing with friends but instead you are sitting here watching this lecture video there is a cost to watching this video and this is your opportunity cost when it comes to trade this is exactly what countries try to figure out what is .

The opportunity cost in terms of what is lost in order to produce the goods that they produce and so we will use opportunity cost when we talk about absolute advantage absolute Vantage has to do with two different trading countries and the ability of one of those countries to use as resources to make a product more effectively or .

Efficiently than the other countries and vice versa the other countries could therefore use their resources more efficiently to make certain other products for instance Canada and Japan I would say that you would look at Japan as being very good at making technologies and you look at Canada's being very good at making resources so .

This is essentially absolute advantage let's take a look now in greater detail so we are going to keep this very very simple consider can and making either automobiles or computers and in a given year let's say they can make twenty automobiles or 100 computers that's all they can make I know that seems a lot low but for this simple simple .

Explanation of absolute advantage we're going to use these numbers if you want you can add millions on to that but we're going to keep it simple so automobiles or computers twenty automobiles or a hundred computers and let's compare it to our trading partner Japan and they can either produce in one given year ten automobiles or two .

Hundred computers taking a look at this right away you can see that there is definitely an absolute advantage at play here Canada and its numbers of automobiles versus computers versus Japan and its numbers can it can produce in a given year twenty on mobiles and a hundred computers Japan ten automobiles and two hundred computers can you see .

Advantage here I think you can and so opportunity cost is calculated by bringing one number under the other number and therefore we're left with the fraction for Canada it costs one-fifth of an automobile to produce one computer for Japan that costs one twentieth of an automobile to produce one computer so it .

Costs Kanda a lot more to produce a computer than it does Japan do you see where this is going and we can do the same the other way we can bring the one number automobiles underneath the computers and therefore just like before we're left with a fraction so it's produced one automobile it costs five or five over one computers for Canada for .

Japan it costs 20 over one or 20 computers to produce one automobile so it costs Japan a lot more computers to produce one automobile and therefore through looking at these opportunity costs of five and 120th we can definitely say that Kanda should focus on producing automobiles while Japan should focus on producing computers each .

Country has an absolute advantage in the product in question and it's decided based on opportunity costs which country has the lower opportunity cost in terms of producing the other good however it doesn't always work like that it's not so easy sometimes and therefore a comparative advantage plays a role now and this is the other scenario that .

Plays out regarding trade and the economics of trade and this is happens when it's all about really those opportunity costs in it one country can produce a good for a lower opportunity cost than the other country comparative advantage is really the foundation for specialization and trade because in some scenarios one country is better at .

Producing all goods than the other country but as a famous economist once said David Ricardo that through comparative advantage countries can find a dancing partner he didn't exactly say that but you know you get the idea and so let's take a look now with two countries again Canada same statistics they can produce twenty .

Automobiles or 100 computers but now instead of developed country like Japan we have Niger and instead of producing all those automobiles and all those computers like Japan did Niger can only produce five automobiles or forty computers in a year from looking at this it looks like Canada has an advantage in both Goods and so why should they ever .

Trade with Niger who can produce far less well again it comes down to comparative advantage and therefore opportunity costs let's take a look so we'll conduct our opportunity cost calculations again and drag one of the numbers from either product category unto the other one and so what we're left with is fractions our opportunity .

Costs for Canada it costs one-fifth of an automobile to produce one computer for Niger it costs one-eighth of an automobile to produce one computer so the opportunity cost for kanda is higher than Niger to do it the other way dragged the automobile number under the computers we're left with opportunity costs for producing automobiles and .

Therefore for Canada it costs five computers to produce one automobile just like before but for Nigeria actually costs eight computers to produce one automobile so these operating costs identify that one country has an advantage in producing automobiles for these opportunity cost calculations we can clearly see each country has a .

Comparative advantage in the production of one good versus the other fork and producing automobiles it costs five computers that's far less than the eight that it cost Niger whereas for Niger it costs one eighth of an automobile to produce one computer versus Canada's number which was one-fifth so it's a lower opportunity .

Cost for Niger and so through these opportunity cost calculations we can clearly identify each country has a comparative advantage and producing their goods and so through comparative advantage we can see that this is actually what's happening in real life Kanda does export nearly fifty thousand dollars worth of goods and .

Services to Niger and so even with a country that's probably one of the least developed countries in the whole world can still trades with them why because of specialization because Niger still has lower opportunity costs in terms of certain goods or services and vice-versa we import twenty five thousand dollars roughly of goods and services from Niger .

And again it all boils down to compared event we're better than Niger producing almost every single good but with some goods there opportunity costs are far lower and thus we have struck a trade relationship with the country well that brings us to our end of our lecture consider this for a second now I want you to identify three countries that .

Have an absolute advantage in labor and they have such an absolute advantage in labor what should we trade with them where should we conduct our trade with whom all these considerations are what the Canadian government takes into account every single year when they strike up trade relationships with countries and .

Businesses do the same right it's about figuring out who has the lower opportunity costs and since countries with an absolute advantage and labor definitely has lower opportunity costs than we do then we should probably try to identify those countries all right so make sure your notes are in order make sure you up your discussion .

Questions for tomorrow and that's it that's all it's everything we'll see you tomorrow

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