Trading to Your Advantage | Cash Course: Economics | PragerU Kids

Before we start this episode, here's a quick preview of what's coming. Ready to take charge of your finances and master the art of money management? Cash Course is your ultimate guide to financial literacy from personal budgeting to macroeconomics. Check out more episodes at prageru.com. If you're going to a party and need to bring a dessert, how do you decide whether to make it yourself or buy it from the store? Oh, totally make it ourselves. We already have the ingredients in a classic family recipe. No, no, no, no. We should definitely buy it. The storebought ones taste just as good and we don't have the time. Babe, you know it's going to take at least all afternoon just to do your hair. Sounds like a tough decision. In the same way, a country must decide whether it's more productive to make a good or service themselves or trade for it and focus on making something else. This decision on whether to produce or trade is based on two economic ideas, absolute and comparative advantage. Let's take a closer look at each. Absolute advantage is when a country can produce more of a good or service than another country. Countries naturally have different production capacities. Those that are larger, have more people available to work, or have more or higher quality natural resources have the absolute advantage. But just because a country can produce the most goods at the cheapest price doesn't mean it should produce most goods. Since time and money are scarce, a country must consider the opportunity cost. What production it gives up when deciding to use resources to produce something else. To consider this, we look at the idea of comparative advantage. When a country can produce a good or service at a lower opportunity cost compared to another country. Since resources are limited, a country that shifts its production towards one good, such as cars, needs to consider what other production it will give up in the process, say computers. If that country is able to give up fewer computers per car that it produces compared to another country, it has a comparative advantage. When a country chooses to produce a good within its comparative advantage, it enables specialization by allowing countries to focus on making what they do best. Come on. You know cookies are my specialty. I can whip some up in no time. Yeah, you said that last time and we were still 2 hours late. Now, let's see how these advantages play out with a basic example. Say country A and country B can produce air fryers and toasters. Country A can produce 10 air fryers or 10 toasters with its resources, while country B can produce six air fryers or two toasters with its resources. Since Country A can make more air fryers and toasters, it has the absolute advantage. But let's look deeper at the opportunity costs. Starting with the air fryers. For country A, making one air fryer means giving up making one toaster. This means the opportunity cost of one air fryer is one toaster. For country B, making one air fryer only means giving up 1/3 of a toaster. Since Country B gives up less to produce an air fryer, it has the comparative advantage in air fryers. Now, let's look at toasters. For country A, making one toaster means giving up one air fryer. So, the opportunity cost of one toaster is one air fryer. For country B, making one toaster means giving up three air fryers. So, the opportunity cost of one toaster is three air fryers. This means country A has a comparative advantage in toasters because it sacrifices fewer air fryers to produce one toaster. My precious, it's perfect. By specializing in what they're best at, country A making toasters and country B making air fryers and then trading with each other, both countries can end up with more air fryers and toasters than if they tried to make both on their own. This is why trade is beneficial. It allows countries to focus on what they do most efficiently and get more of what they need through trade. However, not all countries fully utilize their advantages and the consequences can be significant. For example, say country A insists on producing air fryers since it can produce more than country B. Country A would be less productive than if it had focused on toasters where it has a comparative advantage and traded to get the air fryers. resources would be wasted as well as opportunities to specialize. This could affect the strength of the economy and lead to a lower quality of life for the citizens of that country. On the other hand, there are instances where relying on trade isn't always ideal. Important industries like medicine or technology play a crucial role in national security and economic stability. Outsourcing these industries entirely can create vulnerabilities such as dependence on foreign suppliers during crisis or conflicts. New air fryers for you. Oh yeah, no toasters for you. Trade is an important part of the global economy we live in today. Utilizing the notions of absolute and comparative advantage can help countries get access to more goods and services at lower costs. There are always trade-offs, but striking the balance between trade and self-sufficiency keeps a nation's economy strong and benefits its citizens lives and access to everyday goods. What happened? Babe, I told you we should have just bought them and waste the opportunity to eat these beauties. No way. Okay, grab the car keys. Yeah, thought so. Watch more at pragerukids.com. And parents, don't forget to subscribe.