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In this video we work through an example of a question like you might see on an AP microeconomics or AP Macroeconomics exam determining who has comparative advantage in producing a good using data from a table. Topics include how to calculate opportunity costs and determine who has comparative advantage based on opportunity cost.

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• Is anyone going to comment on how this example is based on Pokémon :D. Kalos and Johto...shiny charms and berries :P
• and he pronounced the region"s name wrong too
• what would be an example of when trade would not be beneficial between 2 countries?
• Trade would not be beneficial if two countries have identical opportunity costs. The source of the gains from trade is differences in comparative advantage, and comparative advantage is lower opportunity cost. So, no difference in opportunity cost implies no comparative advantage.
• why do less efficient countries also have comparative advantage? Intuitively this should not happen.
• It would seem ideal for all of the extremely wealthy and efficient countries to make all the goods and services they need to purchase, but because of specialization and trade, it is more efficient to have other, less efficient countries produce goods. This is why outsourcing to countries in South America and Asia happens. Less efficient countries would have a comparative advantage in this case.
• If the opportunity cost of Kalos for charms is 2 berries / charm, and the opportunity cost of Johto for charms is 3 berries / charm, won't the countries have different amounts of benefit? For instance, if the price was 2.3 berries / charm, then supposedly Kalos will earn 0.3 berries / charm while Johto saves 0.7 berries / charm.
• The idea that different prices within the opportunity cost range can benefit countries differently is correct. If the trading price is set to 2.3 berries per charm, Kalos benefits by gaining more than its opportunity cost of 2 berries per charm (a net gain of 0.3 berries per charm), while Johto saves compared to its opportunity cost of 3 berries per charm (a net saving of 0.7 berries per charm). Thus, while both countries benefit from trade, the distribution of these benefits can vary based on the agreed trading price. This variability doesn't negate the mutual advantage but highlights the negotiation aspect of trade agreements.
• Question about finding a trading price for charms: I think that the way the question is posed in the video might be misleading; it suggests that both countries are trading charms, but I imagine that Kalos would be trading charms for berries while Johto would be trading berries for charms. If that's correct, then wouldn't Kalos pay no more than 1/2 charm per berry (their opportunity cost for berries) since they can produce berries more efficiently themselves? Similarly, wouldn't Johto pay no more than 3 berries per charm (their opportunity cost for charms) since they can produce charms more efficiently themselves?
• A general principle of the terms of trade is that the trading price lies between the two opportunity cost. So, the trading price of a charm will be between 2 berries and 3 berries, and the trading price of a berry will be between 1/3 of a charm and 1/2 of a charm.

You're right that Johto won't pay more than 3 berries per charm, but you've kind of got some of the rest mixed up there... the opportunity cost of berries for Kalos is 1/2 charm per berry, so 1/2 a charm that's the most they'd be willing to pay for berries. Notice that at that price, they'd both want to buy... nobody is willing to sell! Kalos' opportunity cost for charms is 2 berries, so that's the minimum they'd be willing to sell charms for. Kalos will be selling charms, so selling charms at 1/2 a charm per berry is the same as 2 berries per charm. Kalos would be indifferent to trade at that point because they can "sell" themselves a charm for the same benefit (if they give up producing one of their charms they get 2 berries). So, if someone comes along and offers them 2.5 berries per charm, that's a better deal than they can give themselves.

Johto is going to want to buy charms for less than they can produce them itself, so they'd never want to pay more than 3 berries per charm.
• I feel, for the lectures on Microeconomics, the term 'countries' shouldn't be used, or can they?
• Even though Sal uses 'countries' for his example, the principle of comparative advantage is still the same whether he uses 'countries' or 'firms.'
• pokemon? kalos? Johto? Pokemon I think??
lol Gotta love the pokemon
• If Kalos trades 1 charm for 2.5 berries,it would have to sell at least 9 charms to get 22.5 berries which is more than the 20 it would have produced on its own to move beyond its PPC. Similarly Jhoto would sell 22.5 berries and presently have 57.5 berries but would only get 9 charms which is within its PPC. If two countries trade to go beyond the PPC why would Kalos and Jhoto trade?
• If Johto produced 75 berries, and traded 22.5 of them to Kalos in exchange for nine charms, Johto has:
75 - 22.5 = 52.5 berries, and
9 charms

Johto's opportunity cost for producing a charm is 3 berries, so after the trade Johto has:
52.5 + 3(9) = 52.5 + 27 = 79.5 berries of value.

Before the trade, Johto only had 75 berries worth of value. Both countries still benefit from trading, but Johto benefits a lot less than Kalos.
• when love is producing 1000 units of shoes what will be the total cost?
(1 vote)