Comparative Advantage and Specialization Sports and Trade Williams Economics 1

Key Terms Specialization Comparative Advantage Absolute Advantage Opportunity Cost

Specialization Concentration 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? 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 country In sports, comparative advantage explains why some athletes play one sport over another or one position over another

Neighborly Comparative Advantage Chore Total Time Spent in Minutes ADAM DAVID Minutes Spent on Each Chore W/O Trade w/Trade Mow lawn 120 160 80 Weed garden 100 160 200 Time working without trade 220 320 -- Time working with trade 80 200 -- 280 Net gain from trade 20 -- 40 Comparative Advantage explains why specialization arises even when other people enjoy absolute advantage in producing all goods Comparative advantage=do what you do best and trade for rest (or find substitute supplier) If Adam and David each have a lawn to mow and a garden to weed. If Adam mows both lawns and David weeds both gardens, each saves 20 minutes that they can spend doing other things. Adam has absolute advantage in both things, but he benefits from trading. This occurs because each person is relatively more efficient in one activity than another. By specializing, they BOTH save time. WIN/WIN instead of zero-sum gain.

Comparative Advantage U.S. and Japan Labor to make computers 100 120 Labor to grow a ton of wheat 5 8 COPY 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 wheat Assume Japan allocates labor: 120 to computers 180 to wheat How much wheat and computers does the U.S. produce? How much wheat and computers does Japan produce? What are “world” production totals? US produces 1 computer and 40 tons wheat Japan produces one computer and 22.5 tons wheat, World gets 2 computers and 62.5 tons of wheat

U.S. has comparative advantage in production of wheat 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 computer U.S. converts wheat to computers at the rate of ____ tons wheat to 1 computer U.S. sacrifices production of more wheat than Japan in the production of 1 computer U.S. has comparative advantage in production of wheat Japan has comparative advantage in production of computers US=0 labor % 100 = NO COMPUTERS; 300 % 8 = 60 tons wheat Japan=240 % 120 = 2 computers; use rest of labor for wheat, 60%8=7.5 WORLD has 60 + 7.5 tons wheat, for total of 67.5, which is great than prior answer AND two computers. JAPANs converts 120 % 8 or 15 wheat to 1 computer US converts 100 % 5 or 20 tons wheat to one computer

Opportunity Cost Opportunity 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 Ruth Greatest power hitters in history of Major League baseball Left-hand pitcher Begin professional career with Boston Red Sox in 1914 By 1915, was starting pitcher 1916-leads American League in earned run average and shutouts; finished third in strike-outs and wins Leads Red Sox to win World Series championships in 1915, 1916, 1918 U.S. baseball player, one of the greatest hitters and most popular figures in the sport's history. He was born in Baltimore and raised in poverty. He began his career in 1914 as a member of Baltimore's minor-league team, and joined the Boston Red Sox later that season. He started as a pitcher, compiling an outstanding record (94 wins, 46 losses), but switched to the outfield because of his powerful hitting. Sold to the New York Yankees in 1920, he remained with the team until 1934; he played his last year with the Boston Braves (1935). He coached the Brooklyn Dodgers in 1938, but his reputation for irresponsibility prevented his obtaining a permanent coaching or manager's job. His prodigious slugging earned him the nickname "Sultan of Swat." In 1927 he set the most famous of all baseball records when he hit 60 home runs in a single season, a mark that stood until 1961. He hit at least 50 home runs in four separate seasons and at least 40 in each of 11 seasons. His career slugging percentage (.690) remains an all-time record; he ranks second in career home runs (714, behind H. Aaron), runs (2,174, behind T. Cobb), and runs batted in (2,213, again behind Aaron), and third in extra-base hits (1,356, behind Aaron and S. Musial).

Babe, cont’d String of consecutive scoreless innings pitched was 29 No designated hitters at time On days he didn’t pitch, Babe was first baseman or outfielder As 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 York Contract sold to New York Yankees in 1920 Yankees want to sell seats and impressed with Babe’s home run legacy Yankees break league attendance record by 1920 and win American League Pennant 7 times between 1920 and 1932; Yankees also win 4 World Series

Pitching Records of the Boston Red Sox 1915-1918 The Statistics Pitching 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 0.661 Total 291 178 0.620

Hitting Records of the Boston Red Sox 1918-1919 At Bats Hits Batting Ave Home Runs Runs Batted In Team 6,647 1,789 0.269 46 754 Ruth 749 234 0.313 40 180 Ruth/ 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 3,337 Ruth 2,455 908 0.370 235 659 Ruth/ 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 0.600 Shawkey 90 59 0.604 Hoyt 73 47 0.608 Bush 62 38 0.620 Jones 43 27 0.614 Pennock 40 15 0.727 Quinn 26 17 0.605 Collins 25 13 0.658 Total 425 260

What was Babe’s Comparative Advantage? Ruth’s comparative advantage was contingent on how substitutes for him contributed to the team’s win ratio Yankees had a strong pitching staff; didn’t need Ruth Ruth 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 Sox Attendance and receipts increased As a hitter, Ruth helped the Yankees achieve the possible win ratio for their team Comparative 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.

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