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Comparative Advantage and Specialization

Sports and Trade

WilliamsEconomics

Key Terms SpecializationComparative AdvantageAbsolute AdvantageOpportunity Cost

SpecializationConcentration on producing things that a country can produce most efficiently

Why do countries specialize? Specialization means focusing on strengths Success means maximizing profit (increased

exports)

Why do sports teams specialize? Specialization means focusing on strengths Success in sports means maximizing profit Teams want specialty players who will bring

up attendance

Absolute Advantage vs. Comparative Advantage

When a country can produce more of the same “resources” than another country, they have an absolute advantage.Comparative advantage encourages countries to produce those goods for which they have the lower opportunity cost than another countryIn sports, comparative advantage explains why some athletes play one sport over another or one position over another

Neighborly Comparative Advantage

Comparative Advantage explains why specialization arises even when

other people enjoy absolute advantage in

producing all goodsComparative

advantage=do what you do best and trade

for rest (or find substitute supplier)

Chore Total Time

Spent in Minutes

ADAM DAVID

Minutes Spent

on Each Chore

W/Tade W/OTrade

Mow lawn

40 120

160 80

Weed garden

60 100

160 200

Time working without trade

100 220

320 --

Time working with trade

80 200

-- 280

Net gain from trade

20 20 -- 40

Comparative AdvantageU.S. and Japan

U.S. JapanLabor to make computers

100 120

Labor to grow a ton of wheat

5 8COPY this chart into your notebook to answer the following question in class.

What country has the absolute advantage in computer production?What country has the absolute advantage in wheat production?

Assume US allocates labor: 100 units to computers

200 units to wheatAssume Japan allocates labor: 120 to computers

180 to wheatHow much wheat and computers does the U.S. produce?How much wheat and computers does Japan produce?What are “world” production totals?

What if U.S. allocates all of its production to wheat and Japan produces as many computers as possible? How

much does the “world” produce?

Japan converts wheat to computers at the rate of ____ tons wheat to 1 computerU.S. converts wheat to computers at the rate of ____ tons wheat to 1 computerU.S. sacrifices production of more wheat than Japan in the production of 1 computerU.S. has comparative advantage in production of wheatJapan has comparative advantage in production of computers

Opportunity CostOpportunity cost: trade-off; what you give up for decisions

If U.S. makes decision to produce both computers and wheat, it gives up the opportunity to make more wheat

Decision to play a sport or play a certain position in sports has opportunity costs.

Ex: If you play running back in football, you give up the opportunity to throw the ball.

The Story of Babe RuthGreatest power hitters in history of Major League baseballLeft-hand pitcherBegin professional career with Boston Red Sox in 1914By 1915, was starting pitcher1916-leads American League in earned run average and shutouts; finished third in strike-outs and winsLeads Red Sox to win World Series championships in 1915, 1916, 1918

Babe, cont’dString of consecutive scoreless innings pitched was 29No designated hitters at timeOn days he didn’t pitch, Babe was first baseman or outfielderAs part-time hitter, hit 11 home runs in 1918 (tied in American League)Most runs hit by team members: 1 !!1918-1919: Out of 46 homeruns hit by Red Sox, he hits 40 (86%); with only 11% of team’s at bats, accounts for 24% of runs batted in

Babe Goes to New YorkContract sold to New York Yankees in 1920Yankees want to sell seats and impressed with Babe’s home run legacyYankees break league attendance record by 1920 and win American League Pennant 7 times between 1920 and 1932; Yankees also win 4 World Series

The StatisticsPitching Records of the Boston Red Sox

1915-1918

Wins Losses Wins/(Wins + Losses)

Foster 41 22 0.651

Shore 48 34 0.585

Leonard 57 42 0.576

Mays 67 40 0.626

Ruth 78 40 0.661

Total 291 178 0.620

Hitting Records of the Boston Red Sox 1918-1919

At Bats Hits Batting

AveHome Runs

Runs Batted In

Team 6,647 1,789 0.269 46 754Ruth 749 234 0.313 40 180Ruth/Team 0.113 0.131 -- 0.87 0.24

Hitting Records of the New York Yankees 1920-1924

At Bats Hits Batting Average

Home Runs

Runs Batted In

Team 21,891 6,655 0.304 516 3,337Ruth 2,455 908 0.370 235 659Ruth/Team 0.112 0.136 -- 0.455 0.197

Pitching Records of the New York Yankees 1920-1924

Wins Losses Wins/(Wins + Losses)

Mays 66 44 0.600Shawkey 90 59 0.604Hoyt 73 47 0.608Bush 62 38 0.620Jones 43 27 0.614Pennock 40 15 0.727Quinn 26 17 0.605Collins 25 13 0.658Total 425 260 0.620

What was Babe’s Comparative Advantage?

Ruth’s comparative advantage was contingent on how substitutes for him contributed to the team’s win ratioYankees had a strong pitching staff; didn’t need RuthRuth had a comparative advantage as a hitter for the Yankees because they had a stronger pitching staff.

New York could show off Ruth’s talents unlike the Red SoxAttendance and receipts increasedAs a hitter, Ruth helped the Yankees achieve the possible win ratio for their teamComparative advantage explains why Babe Ruth, the best pitcher in the American League in the late 1920s, specialized in hitting home runs after Boston traded him to the New York Yankees.

SummaryAnswer the following questions?

1. What would have been the Yankees' opportunity cost of using Babe Ruth as a pitcher? Note: A pitcher does not usually pitch in every game and hence, will not be in the batter lineup every game.

2. If the Yankees had had a poor pitching staff, in which position(s) would Babe Ruth have a comparative advantage?