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im not understanding Charlie's reason to trade from about
8:14
onwards. "Patty is willing to trade 2 plates for 1 cup." The way i understand this statement is that, for 1 cup, she is willing to forego 2 plates. This is better than her original position as at first she was trading 3 plates for 1 cup. This makes sense. However, Charlie's current position allows him to produce 1 plate for 1 cup (this means that in order to to produce 1 plate, he must forego 1 cup). But now, he is willing to trade '2 plates for 1 cup.' Why would Charlie do that? When he can simply produce 1 plate for 1 cup?Think of it this way. Producing it on his own, Charlie would have to forego 1 cup to produce 1 plate. But Patty is willing to trade 2 plates for 1 cup, so if Charlie trades with her, he is getting twice the amount of plates for 1 cup. Make sense?
I still don't get the difference between comparative advantage and absolute advantage. can anyone help?
Absolute Advantage: is the capability to produce more of a given product than the other country for the same input of resources (time, etc).
Comparative Advantage: the ability to produce a given product for lower opportunity cost over another product
so absolute compares how many plates one produces vs the other country while comparative compares how their opportunity cost differs.
Is the PPF always linear? If not, wouldn't this make the comparative advantage calculation much more difficult?
No, it's not always linear.
Under a linear PPF, comparative advantage is constant so each country will specialize completely.
With a non-linear PPF, countries will specialize to the point where the real exchange rates on each PPF are the same slope. They will import goods that they specialize in because it is more efficient to do so.
With regard to the practice of international trade,discuss THREE ways in which trade specialization does not always work the way the theory of comparative advantage suggests
(found it on the web site //www.globalization101.org/comparative-advantage-versus-absolute-advantage)
No country specializes exclusively in the production and export of a single product or service.
All countries produce at least some goods and services that other countries can produce more efficiently.
A lower income country might, in theory, be able to produce a particular product more efficiently than the United States can but still not be able to identify American buyers or transport the item cheaply to the United States. As a result, U.S. firms continue to manufacture the product.
Is there a way to create a allocative efficiency chart based upon Charlie's marginal cost and Patty's marginal benefit in order to determine the point where they benefit a relatively equally amount outside of their possible production frontier?
why does patty have the comparative advantage?
So is it right on my part to conclude that-
Absolute advantage is a comparison based on cost of production and
comparative advantage is a comparison based on opportunity cost....?Absolute Advantage is the comparison on how many goods you can produce compared to someone else, given the fact that you and the other person are using the same amount of inputs and factors of production.
So would an easy way to determine who has the comparative advantage be that whoever has the lower slope of the line would have advantage in the x-axis commodity, and whoever has the lower slope in the inverse function for the y-axis commodity?
For the comparative advantage, that is correct. You can look at the slope of the line and the individual with the lower slope has the comparative advantage for the item on the x-axis.
I was trying to apply the opportunity cost analysis, like Sal did, on the original example given by Ricardo in his book, that goes as following
Portugal uses 80 labors for production for 1 unit wine whereas for the same amount of wine England has to use 120 labors. And for 1 unit of cloth Portugal uses only 90 labors whereas England 100 labors.
for England
1 wine= .84 cloth
1 cloth=1.2 wine
for Portugal
1 wine= 1.125 cloth
1 cloth= .89 wine
As you can see, this data favors for Portugal producing cloth and England wine, while it doesn't make sense logically and through other methods. Thats my doubt and I would be grateful to be answered.Assuming prices are the same:
Portugal can produce a unit of wine for 80 hours of labor, or cloth for 90.
Portugal choses the one that is cheaper to produce, ie wine.
England can produce one wine with 120
Or cloth with 100.
England chooses its cheaper option, ie cloth.
What if, for example, Patty only has one worker and is producing 30 plates whereas Charlie has many workers and produces 40 plates. Who has the absolute advantage then? Or does it not exist in this scenario?
Yes it does, and Patty would have the absolute advantage.
See1:40