"OOO" Method to calculate Comparative Advantage
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The document outlines the opportunity costs of corn and wheat production in the US and Brazil. It shows that in the US, the opportunity cost of 1 bushel of corn is 2 bushels of wheat, while the opportunity cost of 1 bushel of wheat is 1/2 bushel of corn. In Brazil, the opportunity cost of 1 bushel of corn is 3 bushels of wheat, while the opportunity cost of 1 bushel of wheat is 1/3 bushel of corn. This information can be used to determine which country has a comparative advantage and will likely specialize in and export each good.
"OOO" Method to calculate Comparative Advantage
- 1. Country Corn Opportunity Cost of 1 bushel of Corn In terms of Wheat Wheat Opportunity Cost of 1 bushel of Wheat In terms of Corn US 20C 40W BRAZIL 30C 90W Output Problem. Corn and Wheat are the OUTPUTS as a result of using INPUTS such as Land (acres) and Labor.
- 2. Country Corn Opportunity Cost of 1 bushel of Corn In terms of Wheat Wheat Opportunity Cost of 1 bushel of Wheat In terms of Corn US 20C 40W 1 Corn = _____ 20C 1C = 2W 40W BRAZIL 30C 90W Output Problem. Corn and Wheat are the OUTPUTS as a result of using INPUTS such as Land (acres) and Labor. “OOO” stands for “OUTPUT: OTHER OVER”. CORN (US): When determining the Opportunity Cost of one good (Corn), you take the quantity of the “OTHER” good (Wheat) and put it OVER Corn to form a ratio of Wheat-to-Corn. When you reduce 40W/20C you get 1C = 2W. “OVER”
- 3. Country Corn Opportunity Cost of 1 bushel of Corn In terms of Wheat Wheat Opportunity Cost of 1 bushel of Wheat In terms of Corn US 20C 40W 1 Corn = _____ 20C 1C = 2W 40W BRAZIL 30C 90W 1 Corn = _____ 30C 1C = 3W 90W Output Problem. Corn and Wheat are the OUTPUTS as a result of using INPUTS such as Land (acres) and Labor. “OOO” stands for “OUTPUT: OTHER OVER”. CORN (BRAZIL): When determining the Opportunity Cost of one good (Corn), you take the quantity of the “OTHER” good (Wheat) and put it OVER Corn to form a ratio of Wheat-to-Corn. When you reduce 90W/30C you get 1C = 3W. “OVER”
- 4. Country Corn Opportunity Cost of 1 bushel of Corn In terms of Wheat Wheat Opportunity Cost of 1 bushel of Wheat In terms of Corn US 20C 40W 1 Corn = _____ 20C 1C = 2W 40W 20C 1 Wheat = _____ 40W 1W = ½ (or .5) C BRAZIL 30C 90W 1 Corn = _____ 30C 1C = 3W 90W Output Problem. Corn and Wheat are the OUTPUTS as a result of using INPUTS such as Land (acres) and Labor. “OOO” stands for “OUTPUT: OTHER OVER”. WHEAT (US): When determining the Opportunity Cost of one good (WHEAT), you take the quantity of the “OTHER” good (CORN) and put it OVER WHEAT to form a ratio of Corn-to-Wheat. When you reduce 20C/40W you get 1W = ½ (.5)C. “OVER”
- 5. Country Corn Opportunity Cost of 1 bushel of Corn In terms of Wheat Wheat Opportunity Cost of 1 bushel of Wheat In terms of Corn US 20C 40W 1 Corn = _____ 20C 1C = 2W 40W 20C 1 Wheat = _____ 40W 1W = ½ (or .5) C BRAZIL 30C 90W 1 Corn = _____ 30C 1C = 3W 90W 30C 1 Wheat = _____ 90W 1W =1/3 (or .33) C Output Problem. Corn and Wheat are the OUTPUTS as a result of using INPUTS such as Land (acres) and Labor. “OOO” stands for “OUTPUT: OTHER OVER”. WHEAT (BRAZIL): When determining the Opportunity Cost of one good (WHEAT), you take the quantity of the “OTHER” good (CORN) and put it OVER WHEAT to form a ratio of Corn-to-Wheat. When you reduce 30C/90W you get 1W = 1/3 (.33)C. “OVER”
- 6. Country Corn Opportunity Cost of 1 bushel of Corn In terms of Wheat Wheat Opportunity Cost of 1 bushel of Wheat In terms of Corn US 20C 40W 1 Corn = _____ 20C 1C = 2W 40W 20C 1 Wheat = _____ 40W 1W = ½ (or .5) C BRAZIL 30C 90W 1 Corn = _____ 30C 1C = 3W 90W 30C 1 Wheat = _____ 90W 1W =1/3 (or .33) C Output Problem. Corn and Wheat are the OUTPUTS as a result of using INPUTS such as Land (acres) and Labor. “OOO” stands for “OUTPUT: OTHER OVER”. Now to answer the important questions 1. Which country produces Corn (Wheat) at the LOWEST Opportunity Cost? 2. Which country is SPECIALIZES in Corn (Wheat)? 3. Which country EXPORTS Corn (Wheat)? Imports Corn (Wheat)?