Law of Comparative Advantage, International Business Video Lecture | International Business - B Com

welcome to our video on comparative
advantage brought to you by kanjo comm
comparative advantage is one of the
fundamental building blocks of economics
like opportunity cost to illustrate this
let's take a trip to the land of King
Julien where our friends Gio can Joe and
Kelly are busy manufacturing and
consuming bread and milk let's first
take a look at Joe's production capacity
in one hour
Joe can Joe can either produce five
loaves of bread or he can produce ten
bottles of milk so he has a choice
now Kelly has a different production
capacity in one hour Kelly can produce
either 15 loaves of bread or two bottles
of milk so as you can see from this Joe
is quicker at producing bottles of milk
while Kelly is quicker at producing
loaves of bread now both Joe and Kelly
each need exactly 30 loaves of bread and
20 bottles of milk so let's see what
happens they try to meet their
individual needs by themselves let's
start with Joe now Joe needs 30 loaves
of bread and he produces this bread at
five loaves per hour so it'll take him
six hours to produce the bread needs now
with the milk he needs 10 bottles of
milk and he produces it at 10 bottles
per hour so it'll take him one hour
10/10 is one hour so the total number of
hours he'll spend is six hours in the
bread plus one hour on milk is total of
seven hours now let's look at Kelly
Kelly produces bread a lot faster so she
also needs thirty loaves of bread but
here she will divide it by 15 loaves per
hour it'll only take her two hours to
make the bread but she is slower at
producing the milk she still needs 10
bottles of milk but she only produces it
at two bottles per hour so it'll take
her five hours to produce the milk she
needs so once again her total is two
hours for the bread plus five hours for
the milk is seven total hours so between
the two of them they would spend
fourteen hours if they produced their
goods individually but what if instead
they focused on their strengths and this
is where the law comparative advantage
starts coming into play so instead of
each of them
making their goods separately Joe makes
all no because he's good at that and
Kelly makes all the bread because that's
what she's good at
so let's see what happens Joe will make
20 bottles of milk because he needs to
make milk for both himself and Kelly /
10 bottles per hour that's his rate and
that will take two hours of work for him
now Kelly on the other hand she needs to
make 60 loaves of bread now because
she's making 30 for herself and 30 for
Joe she divides this by her rate of
production
15 lows per hour and that's four hours
of work and then here's where it gets
interesting Joe and Kelly can trade the
bread and milk to each other to get the
amounts they need and they can set
prices as determined by the marketplace
this is the law of comparative advantage
you can focus on your strengths focus on
what you're good at and then trade for
what you need and this will save the
overall economy time and resources as
you can see in this example Joe and
Kelly if they focus on their strengths
they they only spend six hours total two
hours for Joe and four hours for Kelly
as opposed to each of them spending
seven hours on individual work so this
is a good thing they produce the same
amount but it's taken them less time and
that is the strength of comparative
advantage hope this videos helped you
understand why comparative advantage is
important and what kind of a role it can
play in the economy thank you very much
for watching for similar videos I
recommend you check out my web site
www.kpbs.org/news/evening