Comparative advantage - input approach | Basic economic concepts | Microeconomics | Khan Academy

We just finished demonstrating how to calculate opportunity costs and determine who has the comparative advantage in a goods production using the data provided at an output table or production possibilities curve. In that video, we had a table showing the potential output of two goods that two countries could produce with the fixed amount of inputs. In this video, we're going to look at how to calculate opportunity costs and determine who has a comparative advantage in two goods production using the information from what we call an input table.

Let's look at this table and discuss how it differs from the information provided in the table in the previous video. Notice that in this table, we are given not the number of units of output that the two countries can produce; rather, we are given the number of workers needed to produce a single unit of output. So the variable in this table is the number of inputs needed to produce a thousand watermelons or a single bicycle. With this information, we can calculate the opportunity costs of watermelons and bicycles in these two countries and determine who has the comparative advantage in the two goods production.

Let's start with watermelons and country X. I find it very helpful to tell a story when calculating opportunity costs using data from an input table. The four workers needed to produce a single watermelon could have produced how many bicycles? Four workers could have only produced four twelfths of a bicycle because you would have needed three times that many workers in order to produce a single bicycle. That means that per thousand watermelons, this country is giving up only one third of a bicycle.

Now I'm going to go ahead and convert that once again to a decimal to make it easier to compare opportunity costs between the two countries. So, one-third of a bicycle means that the opportunity cost of watermelons is 0.33 bicycles per watermelon. For bicycles, twelve workers are needed. The question is, how many watermelons could those twelve workers have produced? The answer to that is twelve divided by four because three times as many workers are needed to produce a single bicycle as are needed to produce a thousand watermelons.

So, the opportunity cost of bicycles in terms of watermelons is what could have been produced with those twelve workers, which is three watermelons, or in fact, three thousand watermelons are given up for every bicycle produced because the twelve workers needed to produce a bicycle could have produced twelve over four watermelons.

Let's do a similar method to calculate the opportunity cost of watermelons and bicycles in country Y. The six workers needed to produce 1,000 watermelons; how many bicycles could they have produced? Well, they would have needed 24 workers to produce a single bicycle. Therefore, in country Y, six over 24 bicycles are given up in order to produce 1,000 watermelons. That is 1/4 bicycle per watermelon. Convert that to a decimal; I get 0.25 bicycles per watermelon.

How about bicycles? What's the opportunity cost of bicycles? How many watermelons could those 24 workers have produced? Well, only six workers are needed to produce a thousand watermelons. So the opportunity cost of each bicycle is the 4,000 watermelons that could have been produced using the 24 workers needed to produce a single bicycle.

We now have our opportunity costs of bicycles and watermelons in these two countries. The next thing we need to do is simply determine who has the lower opportunity cost for watermelons and who has a lower opportunity cost for bicycles to determine who should specialize based on the principle of comparative advantage.

Let's start with watermelons. We can see right away that a single watermelon costs less of a bicycle in country Y than it does in country X. Only one quarter, or 0.25 bicycles, are given up compared to 0.33 in country X. That gives country Y a comparative advantage in watermelon production.

And yes, predictably, country X therefore has a comparative advantage in bicycle production. Country X gives up only 3,000 watermelons for every bicycle it produces, whereas country Y gives up 4,000 watermelons for every bicycle it produces.

Based on these calculations, we can come to the following conclusions: Country X should specialize in the production of bicycles because it has the lower opportunity cost compared to country Y. Next, country Y should specialize in the production of watermelons since it can produce watermelons at a lower opportunity cost of 0.25 bicycles per watermelon compared to country X, which must give up 0.33 bicycles per watermelon.

So how do the two countries get the goods that they do not produce domestically? They should trade with one another, and through trade, both countries can enjoy the good that they are not producing domestically at a lower opportunity cost than they could have produced it at domestically.

To review, the difference between what we call an input table and what we call an output table is that the variable given to us is not the number of units of output that can be produced; rather, it is the number of units of inputs needed to produce a single unit of output. The input in this table was the number of workers needed to grow a thousand watermelons and the number of workers needed to produce a single bicycle. We can calculate opportunity costs and determine who has a comparative advantage in two goods productions from the data in an input table.