WHAT IS GLOBAL FINANCE?
WHAT IS GLOBAL FINANCE?
7
Table 2.1
Productivity per day worked.
Coconuts
Fish
Person A
20
20
Person B
10
16
A could tell B, ``You are a bad worker, so stay out of my way and do
nothing.'' The result of this would be a maximum production capacity
of either 20 coconuts or 20 fish per day.
B may be a less productive worker, but he can still make a
contribution. To find the most productive way of dividing their
labor, they look at the ``opportunity cost'' of the alternatives (see
Table 2.2).
Table 2.2
Opportunity cost.
Produced
Opportunity cost
When A collects coconuts
20 coconuts
20 fish not caught
When B collects coconuts
10 coconuts
16 fish not caught
When A catches fish
20 fish
20 coconuts not collected
When B catches fish
16 fish
10 coconuts not collected
A and B need both coconuts and fish. If A catches fish and B collects
coconuts, they will produce 20 fish and 10 coconuts per day, but if A
collects coconuts and B catches fish, they will produce 16 fish and 20
coconuts.
Since they both agree that 1 coconut is worth 1 fish, they will
collectively produce more units of value (36) if A collects coconuts and
B collects fish than if they divide their labor the other way around (30
units of value).
In economic jargon, A has an ``absolute'' advantage in both coconut
and fish production. B, however, has a ``comparative'' advantage in
producing fish since he can produce 16 units of value per day for an
opportunity cost of only 10 units of value.
