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Finance: What is comparative advantage? 22 Views

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Description:

Comparative advantage refers to what one party sacrifices in order to create a product or service compared to another. The one who loses out less has a comparative advantage. For example, LeBron James can ostensibly play any of the 5 positions on a basketball team, as he is 6’8”, can shoot from anywhere on the court, and is strong and quick enough to rebound and defend against bruising centers or speedy point guards. Steph Curry is one of the premier 3-point shooting point guards in the NBA, but he is slight of stature and an average 6’3”. As Curry can really only play point guard or shooting guard, but at a premier level against any other teams in the NBA, he would have the comparative advantage at those positions over LeBron, who is more valuable as a small or power forward...positions at which Curry would be ineffective. LeBron would have the comparative advantage at either forward or center, as he is more valuable to a team in those positions, and his other talents and physical skill sets are otherwise wasted with him playing as a guard. Comparative advantages can be analyzed in the corporate, industry, individual or even in the military or other sectors.

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Transcript

00:00
Finance a la shmoop... what is comparative advantage, well comparative advantage is
00:08
literally just that when a producer of a product or service has a relative or
00:12
comparative advantage over another they should produce that product everything [Products on a conveyor belt]
00:17
else being equal
00:23
Shmoops general counsel lawyer dude is an amazingly fast typist [Person typing]

00:28
he types 90 words a minute and never makes a mistake
00:32
but he's a really good lawyer so we compared his advantages we could get
00:37
someone else to be secretary Bonzo here types 82 words a minute but is terrible [Bonzo typing frantically]
00:43
at dealing with patent offices intends to eat any subpoenas that are served it's great
00:47
that Bonzo is fast at typing but the value of producing something is relative
00:52
to the opportunity cost of not having it all right so you country A here might [Chair transports from country A to emporium]
00:58
not be better on an absolute level at producing something versus another
01:02
country, country B here but you might have lower trade-offs alright a couple
01:06
of quick country examples Kuwait produces oil and also chemicals it has a [Woman pouring substance into beaker]
01:11
comparative advantage in chemicals because chemicals are a byproduct of oil
01:16
its opportunity cost for producing chemicals is relatively low because of
01:20
its spill off from its oil meaning it's almost free to go produce it moving on
01:25
[Woman speaking to customer] second filipino customer care well it is relatively cheap to outsource customer
01:30
care to the philippines they have a comparative advantage because those same
01:34
workers aren't giving up producing some other output they have no other jobs
01:39
nothing else for them to do there are a pretty educated workforce and you know [Filipino people stacking boxes]
01:42
there's no minimum wage all right example three and usually you need a
01:46
mathematical example here so we'll throw one in Irv and Dave can both produce
01:50
tomatoes or cauliflower here's the time it takes Irv working alone to produce
01:55
each...
01:58
here's Dave....
02:02
all right well clearly Irv should produce tomatoes because he's better at [Irv carrying basket of tomatoes]
02:06
it than Dave is Dave should produce cauliflower because he's better at it [Tomato hits Dave in the head]
02:10
then he is at tomatoes and while the opportunity cost works favorably to his
02:14
advantage there so yeah that's comparative advantage in a few different
02:19
examples and as Bonzo likes to call it [Bonzo screams and waves arms in the air]
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