Hey Guys,
I am studying simultaneously from the Schweser and CFA books and noticed that the “Comparative advantage” topic in the Schweser book is different from the CFA book. the explanation in each book actually contradicts.
am i missing something here? Appreciate anyone’s help.
Thanks,
Nicolas
Look it up on several sources online, should be consistent. I’d trust the CFAI material, but they could be wrong.
Be sure not to mix it was absolute advantage.
Comparative advantage arises when a country/company has a lower opportunity cost of producing a good than another country/company.
thanks! i absolutely know the difference. if you have the Schweser notes you will see what i am talking about. they actually do the opposit of how it is done in the CFA books. so your comparative advantage (opportunity cost) ends up being wrong.
If anyone studying in the Scheweser notes and able to spot this mistake would appreciate if you bring it to our attention.
it’s study session 6 - international Trade and Capital Flow ( in Scheweser)
If you could give us more details (page in the Schweser?), it’d help. I haven’t found a mistake when i went through econ though.
Page 210 - International Trade and Capital Flow Chapter
example England/Portugal, Cloth/wine. According to the Schweser method Portugal has a comparative advantage in wine, while England has a comparative advantage in cloth.
now if you refer to Page 432 of the CFA book and apply this method to the Scheweser example you will get: Portugal with a comparative advantage in Cloth, while England has a comparative advantage in wine.
so answers are contradicting.
Sometimes they do the problems in # hours required to produce 1 good, as opposed to # goods produced in 1 hr.
Could this be the confusion? Sorry i don’t have schweser to help you out but I owuld be very surprised if Schweser was misinformed on such a well established principle.
Thanks!
They explicitly derived the opportunity cost based on 1 unit of the other. I am very surprised that Schweser did that mistake, unless i am missing something.
Both ways i am contacting them on Monday to clarify it. until then if anyone has a explanation, would appreciate it.
Before you contact Schweser, you should make sure that you understand their example on p. 210.
In England, (considering labor cost only) cloth is cheaper to produce than wine: the amount of labor that produces one unit of wine produces 1.1 (= 110 / 100) units of cloth.
In Portugal, (considering labor costs only) cloth is more expensive to produce than wine: the amount of labor that produces one unit of wine produces 0.89 (= 80 / 90) units of cloth.
Therefore, England has a comparative advantage over Portugal in cloth production (vis-à-vis wine production).
A similar analysis shows that Portugal has a comparative advantage over England in wine production (vis-à-vis cloth production).
Schweser’s example is correct.
thank you ! all clear now. i guess i missed to take into account labor cost instead of production units. make sense.
My pleasure.
Good to hear.
Note, too, that Schweser’s example goes overboard. Imagine that the costs per unit had been:
Here, although wine is more expensive (absolutely) than cloth in Portugal (unlike the original example, where it’s less expensive), it’s still the case that England has a comparative advantage in cloth (110/100 = 1.1 in England, vs. 95/90 = 1.056 in Portugal), and Portugal still has a comparative advantage in wine.
Thus, you don’t have to have good A more expensive than good B in one country, and good B more expensive than good A in the other country.
yep exactly ! thanks for the thorough explanation
You’re quite welcome!