Econ: Comparative Advantage (cost vs output questions)

CFA Level I
#1

Hi guys, are there any differences between calculating comparative advantage in terms of cost and output. I’ve seen 2 different types of these during practice.

Labor cost per unit

x y

England 100 110

Portugal 90 80

Absolute Advantage: Portugal (because it’s cheaper)

Comparative Advantage: y - portugal (y/x = 80/90)

x - england (x/y = 100/110)

Output per unit

x y

England 600 900

Portugal 400 800

Absolute Advantage: England (because it can produce more)

Comparative Advantage: y - portugal (x/y = 400/800)

x - england (y/x = 900/600)

Notice the difference between how they use the items as numerators/denominators. In price terms, the numerator is the product itself but the same cannot be said when the question deals with outputs. Why do I have to do the inverse for output-themed questions? Thanks

#2

I also noticed the different calculation between Schweser and curiculum. The comparative advantage measured by opportunity cost of another good is:

Curriculum

cost of input of another good/cost of input of asked good

Scwesser (opposite)

cost of input of asked good/cost of input of another good.

Also I have not found anything in Errata regarding this matter.

#3

So that’s why CFAI questions tend confuse me on that, I have only read the Schweser materials. Relatively easy question but I sometimes get it wrong due to this confusion. My only way of solving correctly is remembering to do the inverse for output-themed questions.

#4

That’ s why I find curriculum more relevant (even if its calculations are wrong), because exam is held and organized by CFA Institute not by Schweser or some other 3rd party. Anyway, Schweser helped me a lot in Quant- probabilities and other difficult areas.

#5

Consider England.

For each unit of labour you input in x, you could have produced 100/110 units of y.

For each unit of x you produce, you could have produced 900/600 units of y.

The fractions change because in the first part you are given labour cost and in the second part you are given output.

#6

Gigaloo explained well… When dealing with output, yoiu want to look at the country that has the largest output as in line with he comparative advantage, while the reverse is the case with cost.

#7

Thanks guys, I hope I can still cram that into my brain all the way to Saturday.