[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:09.57,0:00:11.49,Default,,0000,0000,0000,,- [Alex] In our last video,
Dialogue: 0,0:00:11.49,0:00:14.49,Default,,0000,0000,0000,,Don Boudreaux used\Nthe simple example of Bob and Anne
Dialogue: 0,0:00:14.49,0:00:15.92,Default,,0000,0000,0000,,to demonstrate\Ncomparative advantage.
Dialogue: 0,0:00:15.92,0:00:18.92,Default,,0000,0000,0000,,In the next two videos,
Dialogue: 0,0:00:18.92,0:00:19.92,Default,,0000,0000,0000,,we'll dive deeper\Ninto comparative advantage
Dialogue: 0,0:00:19.92,0:00:22.28,Default,,0000,0000,0000,,and give you a homework question
Dialogue: 0,0:00:22.28,0:00:25.53,Default,,0000,0000,0000,,to test how well you're doing\Nin understanding the concept.
Dialogue: 0,0:00:26.68,0:00:29.68,Default,,0000,0000,0000,,Let's get going.
Dialogue: 0,0:00:30.09,0:00:34.07,Default,,0000,0000,0000,,Comparative advantage\Nis the theory of trade.
Dialogue: 0,0:00:34.25,0:00:37.24,Default,,0000,0000,0000,,It explains why people trade,\Nand which good people should trade
Dialogue: 0,0:00:37.24,0:00:40.24,Default,,0000,0000,0000,,if they want to maximize\Ntheir well being.
Dialogue: 0,0:00:40.24,0:00:44.52,Default,,0000,0000,0000,,It's actually useful to understand\Ncomparative advantage
Dialogue: 0,0:00:44.70,0:00:46.47,Default,,0000,0000,0000,,to begin with a false theory,
Dialogue: 0,0:00:46.47,0:00:49.47,Default,,0000,0000,0000,,a very plausible\Nbut incorrect theory of trade --
Dialogue: 0,0:00:49.47,0:00:51.08,Default,,0000,0000,0000,,namely the theory\Nof absolute advantage.
Dialogue: 0,0:00:51.08,0:00:54.08,Default,,0000,0000,0000,,So let's consider a simple model.
Dialogue: 0,0:00:54.08,0:00:58.18,Default,,0000,0000,0000,,Let's suppose that labor\Nis the only good used in production
Dialogue: 0,0:00:58.36,0:01:01.57,Default,,0000,0000,0000,,and that we can produce\Ncomputers or shirts.
Dialogue: 0,0:01:01.57,0:01:04.57,Default,,0000,0000,0000,,Let's suppose that in Mexico\Nit takes 12 units of labor
Dialogue: 0,0:01:04.57,0:01:07.90,Default,,0000,0000,0000,,to produce one computer.
Dialogue: 0,0:01:07.90,0:01:08.98,Default,,0000,0000,0000,,Again, in Mexico,
Dialogue: 0,0:01:08.98,0:01:11.98,Default,,0000,0000,0000,,it takes two units of labor\Nto produce one shirt.
Dialogue: 0,0:01:11.98,0:01:12.98,Default,,0000,0000,0000,,Now let's compare it\Nwith the United States.
Dialogue: 0,0:01:12.98,0:01:15.46,Default,,0000,0000,0000,,To make it simple, we'll suppose\Nin the United States
Dialogue: 0,0:01:15.46,0:01:20.47,Default,,0000,0000,0000,,it takes just one unit of labor\Nto make one computer,
Dialogue: 0,0:01:20.65,0:01:24.79,Default,,0000,0000,0000,,and one unit of labor\Nto create one shirt.
Dialogue: 0,0:01:24.79,0:01:27.79,Default,,0000,0000,0000,,Now, from the absolute advantage\Ntheory of trade it should --
Dialogue: 0,0:01:27.79,0:01:30.01,Default,,0000,0000,0000,,it may seem obvious\Nthat there in fact will --
Dialogue: 0,0:01:30.01,0:01:33.01,Default,,0000,0000,0000,,be no trade here.
Dialogue: 0,0:01:33.01,0:01:38.66,Default,,0000,0000,0000,,It may seem obvious\Nthat the United States
Dialogue: 0,0:01:38.84,0:01:41.34,Default,,0000,0000,0000,,will outcompete Mexico\Non all margins.
Dialogue: 0,0:01:41.34,0:01:44.34,Default,,0000,0000,0000,,After all, the United States\Nin this example
Dialogue: 0,0:01:44.34,0:01:45.53,Default,,0000,0000,0000,,is much more productive\Nat producing computers
Dialogue: 0,0:01:45.53,0:01:48.53,Default,,0000,0000,0000,,and also more productive\Nat producing shirts than Mexico.
Dialogue: 0,0:01:48.53,0:01:50.27,Default,,0000,0000,0000,,So this is a case\Nwhere we might think,
Dialogue: 0,0:01:50.27,0:01:53.27,Default,,0000,0000,0000,,with the United States\Nso much better
Dialogue: 0,0:01:53.27,0:01:55.66,Default,,0000,0000,0000,,at producing\Nboth computers and shirts,
Dialogue: 0,0:01:55.66,0:01:58.66,Default,,0000,0000,0000,,that certainly there's no reason
Dialogue: 0,0:01:58.66,0:02:03.47,Default,,0000,0000,0000,,for the United States\Nto trade with Mexico,
Dialogue: 0,0:02:03.47,0:02:06.47,Default,,0000,0000,0000,,its less productive neighbor.
Dialogue: 0,0:02:06.47,0:02:08.95,Default,,0000,0000,0000,,That's the theory\Nof absolute advantage.
Dialogue: 0,0:02:08.95,0:02:11.95,Default,,0000,0000,0000,,It's very plausible;\Nit's also very wrong.
Dialogue: 0,0:02:11.95,0:02:15.78,Default,,0000,0000,0000,,To see why it's wrong,\Nlet's take another simple example.
Dialogue: 0,0:02:15.96,0:02:18.58,Default,,0000,0000,0000,,Here's a picture of Martha Stewart\Nironing her shirt.
Dialogue: 0,0:02:18.58,0:02:21.58,Default,,0000,0000,0000,,Now, let's stipulate\Nthat Martha Stewart
Dialogue: 0,0:02:21.58,0:02:23.48,Default,,0000,0000,0000,,has an absolute advantage\Nin ironing.
Dialogue: 0,0:02:23.48,0:02:26.48,Default,,0000,0000,0000,,She has an advantage in ironing\Njust like the United States
Dialogue: 0,0:02:26.48,0:02:30.34,Default,,0000,0000,0000,,had an advantage in producing\Ncomputers and shirts
Dialogue: 0,0:02:30.52,0:02:31.52,Default,,0000,0000,0000,,in the previous example.
Dialogue: 0,0:02:31.52,0:02:33.66,Default,,0000,0000,0000,,In other words, we'll stipulate\Nthat Martha Stewart
Dialogue: 0,0:02:33.66,0:02:38.70,Default,,0000,0000,0000,,can iron a shirt better\Nand in less time than anyone else.
Dialogue: 0,0:02:38.80,0:02:43.19,Default,,0000,0000,0000,,So if Martha Stewart has\Nan absolute advantage in ironing
Dialogue: 0,0:02:43.20,0:02:47.19,Default,,0000,0000,0000,,should Martha Stewart\Niron her own shirts?
Dialogue: 0,0:02:47.19,0:02:50.19,Default,,0000,0000,0000,,Of course the answer here is, no.
Dialogue: 0,0:02:50.19,0:02:53.29,Default,,0000,0000,0000,,Why not?
Dialogue: 0,0:02:53.29,0:02:56.29,Default,,0000,0000,0000,,Well, every hour\Nwhich Martha Stewart spends
Dialogue: 0,0:02:56.29,0:02:58.59,Default,,0000,0000,0000,,ironing her shirts is an hour\Nshe's not spending
Dialogue: 0,0:02:58.59,0:03:01.59,Default,,0000,0000,0000,,doing something else\Nwhich is even more valuable,
Dialogue: 0,0:03:01.59,0:03:03.71,Default,,0000,0000,0000,,running her own business\Nfor example --
Dialogue: 0,0:03:03.71,0:03:06.71,Default,,0000,0000,0000,,running her billion-dollar business.
Dialogue: 0,0:03:06.71,0:03:08.70,Default,,0000,0000,0000,,And in fact in a famous statement,\NMartha Stewart --
Dialogue: 0,0:03:08.70,0:03:11.70,Default,,0000,0000,0000,,because she's very wise --
Dialogue: 0,0:03:11.70,0:03:13.67,Default,,0000,0000,0000,,she said, "I don't always\Ndo all of my own ironing,
Dialogue: 0,0:03:13.67,0:03:16.67,Default,,0000,0000,0000,,even though I wish that I could."
Dialogue: 0,0:03:16.67,0:03:21.12,Default,,0000,0000,0000,,Let's take a little bit more detail\Nabout why it doesn't make sense
Dialogue: 0,0:03:21.30,0:03:24.37,Default,,0000,0000,0000,,for Martha Stewart\Nto iron her own shirts.
Dialogue: 0,0:03:24.37,0:03:27.37,Default,,0000,0000,0000,,The most important point\Nto remember
Dialogue: 0,0:03:27.37,0:03:29.65,Default,,0000,0000,0000,,is that the important cause\Nis opportunity cost.
Dialogue: 0,0:03:29.65,0:03:32.65,Default,,0000,0000,0000,,So what is the opportunity cost\Nto Martha Stewart
Dialogue: 0,0:03:32.65,0:03:34.51,Default,,0000,0000,0000,,of spending an hour\Nironing her own shirts?
Dialogue: 0,0:03:34.51,0:03:37.51,Default,,0000,0000,0000,,Well, it could be\Nthousands of dollars, at least.
Dialogue: 0,0:03:37.51,0:03:43.70,Default,,0000,0000,0000,,Martha Stewart would be better off
Dialogue: 0,0:03:43.88,0:03:45.76,Default,,0000,0000,0000,,if she specializes in producing\Nher television show,
Dialogue: 0,0:03:45.76,0:03:46.76,Default,,0000,0000,0000,,and then she trades\Nwith someone else
Dialogue: 0,0:03:46.76,0:03:48.76,Default,,0000,0000,0000,,who has a lower\Nopportunity cost of ironing.
Dialogue: 0,0:03:48.76,0:03:51.54,Default,,0000,0000,0000,,It doesn't make sense\Nfor Martha Stewart
Dialogue: 0,0:03:51.54,0:03:54.54,Default,,0000,0000,0000,,to iron her own shirts\Nbecause the cost of her doing so
Dialogue: 0,0:03:56.38,0:03:59.38,Default,,0000,0000,0000,,is devoting her time to something\Nwhere she's even more valuable
Dialogue: 0,0:03:59.38,0:04:02.18,Default,,0000,0000,0000,,or she's even better,
Dialogue: 0,0:04:02.18,0:04:05.18,Default,,0000,0000,0000,,and that is producing\Nher own television show.
Dialogue: 0,0:04:05.18,0:04:08.23,Default,,0000,0000,0000,,So Martha Stewart\Nhas a comparative advantage
Dialogue: 0,0:04:08.23,0:04:11.23,Default,,0000,0000,0000,,in running her business,\Nor to put it slightly differently
Dialogue: 0,0:04:11.23,0:04:15.91,Default,,0000,0000,0000,,she has a comparative\Ndisadvantage in ironing.
Dialogue: 0,0:04:16.09,0:04:21.81,Default,,0000,0000,0000,,The cost to her of ironing\Nis very high
Dialogue: 0,0:04:21.99,0:04:28.97,Default,,0000,0000,0000,,precisely because she is so much\Nmore productive at other tasks.
Dialogue: 0,0:04:29.15,0:04:32.02,Default,,0000,0000,0000,,So Martha Stewart wants\Nto specialize in what she is best at,
Dialogue: 0,0:04:32.02,0:04:35.02,Default,,0000,0000,0000,,in where she has\Na comparative advantage.
Dialogue: 0,0:04:35.02,0:04:37.77,Default,,0000,0000,0000,,Other people are almost as good\Nas her at ironing clothes,
Dialogue: 0,0:04:37.77,0:04:40.77,Default,,0000,0000,0000,,but they're not as good as her\Nat producing their own TV show.
Dialogue: 0,0:04:40.77,0:04:44.47,Default,,0000,0000,0000,,So that's why Martha Stewart\Nshouldn't iron her own shirts.
Dialogue: 0,0:04:46.60,0:04:48.84,Default,,0000,0000,0000,,Let's go back now\Nto our previous example
Dialogue: 0,0:04:48.84,0:04:51.84,Default,,0000,0000,0000,,of the United States and Mexico.
Dialogue: 0,0:04:51.84,0:04:55.87,Default,,0000,0000,0000,,So the key to comparative advantage\Nis understanding opportunity cost.
Dialogue: 0,0:04:56.05,0:05:00.81,Default,,0000,0000,0000,,So let's take this previous figure\Nwe had from a previous slide
Dialogue: 0,0:05:00.99,0:05:03.46,Default,,0000,0000,0000,,and turn it\Ninto an opportunity cost figure.
Dialogue: 0,0:05:03.46,0:05:06.46,Default,,0000,0000,0000,,So remember\Nwhat this top figure tells us --
Dialogue: 0,0:05:06.46,0:05:08.39,Default,,0000,0000,0000,,it tells us for example\Nthat in Mexico
Dialogue: 0,0:05:08.39,0:05:11.39,Default,,0000,0000,0000,,it takes 12 units of labor\Nto produce one computer,
Dialogue: 0,0:05:11.39,0:05:13.41,Default,,0000,0000,0000,,and in Mexico it takes\Ntwo units of labor
Dialogue: 0,0:05:13.41,0:05:16.41,Default,,0000,0000,0000,,to produce one shirt\Nand so forth.
Dialogue: 0,0:05:16.41,0:05:19.22,Default,,0000,0000,0000,,Okay, for the United States,\Nit just takes one unit of labor
Dialogue: 0,0:05:19.22,0:05:21.08,Default,,0000,0000,0000,,to produce\Neither a computer or a shirt.
Dialogue: 0,0:05:21.40,0:05:27.46,Default,,0000,0000,0000,,Okay, now let's begin\Nwith an easy case.
Dialogue: 0,0:05:27.64,0:05:34.08,Default,,0000,0000,0000,,What's the opportunity cost of\None computer in the United States?
Dialogue: 0,0:05:34.26,0:05:35.96,Default,,0000,0000,0000,,In other words, to produce\Nan additional computer
Dialogue: 0,0:05:35.96,0:05:38.96,Default,,0000,0000,0000,,in the United States,\Nwhat would we have to give up?
Dialogue: 0,0:05:38.96,0:05:40.25,Default,,0000,0000,0000,,Well, in order to get\Nthat additional computer,
Dialogue: 0,0:05:40.25,0:05:43.25,Default,,0000,0000,0000,,we'd have to take labor\Nfrom shirt production
Dialogue: 0,0:05:43.25,0:05:44.94,Default,,0000,0000,0000,,and move it\Ninto computer production.
Dialogue: 0,0:05:44.94,0:05:47.94,Default,,0000,0000,0000,,In particular, we have to take\None unit of labor
Dialogue: 0,0:05:47.94,0:05:53.28,Default,,0000,0000,0000,,from shirt production and move it\Ninto computer production.
Dialogue: 0,0:05:53.46,0:05:58.97,Default,,0000,0000,0000,,That would get us one more computer\Nat the cost of one shirt.
Dialogue: 0,0:05:59.15,0:06:01.57,Default,,0000,0000,0000,,So the opportunity cost
Dialogue: 0,0:06:01.57,0:06:02.57,Default,,0000,0000,0000,,of one computer\Nin the United States is one shirt.
Dialogue: 0,0:06:02.57,0:06:04.57,Default,,0000,0000,0000,,What is the opportunity cost\Nof a shirt?
Dialogue: 0,0:06:04.57,0:06:08.25,Default,,0000,0000,0000,,Well, the opportunity cost\Nof a shirt,
Dialogue: 0,0:06:08.43,0:06:12.82,Default,,0000,0000,0000,,what you're giving up\Nto produce an extra shirt,
Dialogue: 0,0:06:12.82,0:06:13.82,Default,,0000,0000,0000,,is one computer.
Dialogue: 0,0:06:13.82,0:06:15.82,Default,,0000,0000,0000,,Okay, slightly harder case --
Dialogue: 0,0:06:15.82,0:06:20.21,Default,,0000,0000,0000,,what's the opportunity cost\Nof one computer in Mexico?
Dialogue: 0,0:06:20.21,0:06:23.21,Default,,0000,0000,0000,,So in Mexico, in order to get\Nan additional computer,
Dialogue: 0,0:06:23.21,0:06:25.39,Default,,0000,0000,0000,,you'd have to transfer labor
Dialogue: 0,0:06:25.39,0:06:28.39,Default,,0000,0000,0000,,from shirt production\Ninto computer production.
Dialogue: 0,0:06:28.39,0:06:32.16,Default,,0000,0000,0000,,But how many units of labor\Ndo you need to transfer?
Dialogue: 0,0:06:32.34,0:06:34.45,Default,,0000,0000,0000,,You need to transfer\N12 units of labor
Dialogue: 0,0:06:34.45,0:06:35.45,Default,,0000,0000,0000,,in order to get one computer.
Dialogue: 0,0:06:35.45,0:06:37.45,Default,,0000,0000,0000,,You're going to have\Nto take 12 units of labor
Dialogue: 0,0:06:37.45,0:06:40.01,Default,,0000,0000,0000,,from shirt production.
Dialogue: 0,0:06:40.01,0:06:43.01,Default,,0000,0000,0000,,That means how many fewer shirts?
Dialogue: 0,0:06:43.01,0:06:45.34,Default,,0000,0000,0000,,Since it takes two units of labor\Nto produce one shirt,
Dialogue: 0,0:06:45.34,0:06:48.34,Default,,0000,0000,0000,,and you've got to move\N12 units of labor.
Dialogue: 0,0:06:48.34,0:06:53.82,Default,,0000,0000,0000,,It means that the opportunity cost\Nof one computer is six shirts.
Dialogue: 0,0:06:54.00,0:06:57.12,Default,,0000,0000,0000,,If you need an additional computer,
Dialogue: 0,0:06:57.12,0:06:58.12,Default,,0000,0000,0000,,it's going to cost you\Nsix fewer shirts
Dialogue: 0,0:06:58.12,0:07:00.12,Default,,0000,0000,0000,,in order to get that computer.
Dialogue: 0,0:07:00.12,0:07:03.70,Default,,0000,0000,0000,,Going the other way, in order\Nto get an additional shirt,
Dialogue: 0,0:07:03.88,0:07:07.45,Default,,0000,0000,0000,,you're going to have to give up\None-sixth of a computer.
Dialogue: 0,0:07:07.45,0:07:10.45,Default,,0000,0000,0000,,Okay, so now we have\Nour opportunity cost,
Dialogue: 0,0:07:10.45,0:07:12.15,Default,,0000,0000,0000,,and now it's actually pretty simple
Dialogue: 0,0:07:12.15,0:07:15.15,Default,,0000,0000,0000,,because what the theory\Nof comparative advantage says
Dialogue: 0,0:07:15.15,0:07:18.17,Default,,0000,0000,0000,,is that you should produce,\Nor you can produce at lowest cost.
Dialogue: 0,0:07:18.17,0:07:21.17,Default,,0000,0000,0000,,So who here has the lowest cost\Nof producing a computer?
Dialogue: 0,0:07:21.17,0:07:28.23,Default,,0000,0000,0000,,The lowest cost\Nof producing a computer
Dialogue: 0,0:07:28.41,0:07:29.94,Default,,0000,0000,0000,,is the United States.
Dialogue: 0,0:07:29.94,0:07:32.94,Default,,0000,0000,0000,,The United States is\Nthe low opportunity cost producer
Dialogue: 0,0:07:32.94,0:07:40.05,Default,,0000,0000,0000,,of computers.
Dialogue: 0,0:07:40.05,0:07:41.05,Default,,0000,0000,0000,,Now, who is the low cost\Nproducer of shirts?
Dialogue: 0,0:07:41.05,0:07:43.05,Default,,0000,0000,0000,,Well, it's Mexico.
Dialogue: 0,0:07:43.05,0:07:45.16,Default,,0000,0000,0000,,In Mexico, you're only giving up\None-sixth of a computer
Dialogue: 0,0:07:45.16,0:07:48.16,Default,,0000,0000,0000,,to produce a shirt.
Dialogue: 0,0:07:48.16,0:07:49.16,Default,,0000,0000,0000,,In the United States,\Nyou're giving up one computer
Dialogue: 0,0:07:49.16,0:07:51.90,Default,,0000,0000,0000,,to produce a shirt.
Dialogue: 0,0:07:51.90,0:07:56.23,Default,,0000,0000,0000,,So you'd much rather\Nproduce shirts in Mexico
Dialogue: 0,0:07:56.23,0:07:59.23,Default,,0000,0000,0000,,where the opportunity cost is lower.
Dialogue: 0,0:07:59.23,0:08:02.65,Default,,0000,0000,0000,,Okay, what we're learning here
Dialogue: 0,0:08:02.65,0:08:05.65,Default,,0000,0000,0000,,is that Mexico ought\Nto specialize in computers
Dialogue: 0,0:08:05.65,0:08:07.71,Default,,0000,0000,0000,,because they're\Nthe low cost producer of --
Dialogue: 0,0:08:07.71,0:08:10.71,Default,,0000,0000,0000,,excuse me, in shirts
Dialogue: 0,0:08:10.71,0:08:11.71,Default,,0000,0000,0000,,because they're\Nthe low cost producer of shirts.
Dialogue: 0,0:08:11.71,0:08:14.43,Default,,0000,0000,0000,,The United States ought\Nto specialize more towards computers
Dialogue: 0,0:08:14.43,0:08:19.81,Default,,0000,0000,0000,,because they're\Nthe low cost producer of computers.
Dialogue: 0,0:08:19.99,0:08:21.38,Default,,0000,0000,0000,,Let's look in more detail.
Dialogue: 0,0:08:21.38,0:08:24.38,Default,,0000,0000,0000,,So I'm going to leave some\Nof the details to you actually
Dialogue: 0,0:08:24.38,0:08:25.38,Default,,0000,0000,0000,,and some homework questions
Dialogue: 0,0:08:25.38,0:08:28.36,Default,,0000,0000,0000,,which we'll go over\Nin the future video.
Dialogue: 0,0:08:28.36,0:08:32.25,Default,,0000,0000,0000,,So question one -- let's suppose\Nin Mexico and in the United States
Dialogue: 0,0:08:32.43,0:08:35.23,Default,,0000,0000,0000,,each have 24 units of labor,
Dialogue: 0,0:08:35.23,0:08:36.23,Default,,0000,0000,0000,,and that each devote\N12 units of labor
Dialogue: 0,0:08:36.23,0:08:38.23,Default,,0000,0000,0000,,to producing computers
Dialogue: 0,0:08:38.23,0:08:40.42,Default,,0000,0000,0000,,and 12 units of labor\Nto producing shirts.
Dialogue: 0,0:08:40.42,0:08:43.42,Default,,0000,0000,0000,,That will be our baseline scenario.
Dialogue: 0,0:08:43.42,0:08:47.23,Default,,0000,0000,0000,,The question is -- "What is total\Nworld production in this scenario?"
Dialogue: 0,0:08:47.23,0:08:48.80,Default,,0000,0000,0000,,That's question one.
Dialogue: 0,0:08:48.80,0:08:54.59,Default,,0000,0000,0000,,Question two -- suppose that Mexico\Nspecializes in producing
Dialogue: 0,0:08:54.77,0:08:56.38,Default,,0000,0000,0000,,what it produces\Nat lowest opportunity cost --
Dialogue: 0,0:08:56.38,0:08:59.38,Default,,0000,0000,0000,,we just saw that was shirts --
Dialogue: 0,0:08:59.38,0:09:02.20,Default,,0000,0000,0000,,and suppose that the U.S.\Ntransfers two units of labor
Dialogue: 0,0:09:02.20,0:09:05.20,Default,,0000,0000,0000,,from shirts to producing\Nwhat it produces
Dialogue: 0,0:09:05.20,0:09:09.03,Default,,0000,0000,0000,,at lowest opportunity cost --\Nthat's computers.
Dialogue: 0,0:09:09.03,0:09:12.03,Default,,0000,0000,0000,,What then\Nis total world production?
Dialogue: 0,0:09:12.03,0:09:16.86,Default,,0000,0000,0000,,Finally, can trade make\Nboth countries better off?
Dialogue: 0,0:09:17.04,0:09:19.76,Default,,0000,0000,0000,,Here what I'd like you to do\Nis give a concrete example
Dialogue: 0,0:09:19.76,0:09:22.76,Default,,0000,0000,0000,,of how many units have to be traded\Nfrom where to where
Dialogue: 0,0:09:22.76,0:09:24.53,Default,,0000,0000,0000,,in order to make\Nboth countries better off,
Dialogue: 0,0:09:24.53,0:09:27.53,Default,,0000,0000,0000,,if that in fact is possible.
Dialogue: 0,0:09:27.53,0:09:28.79,Default,,0000,0000,0000,,So to help you along a little bit --
Dialogue: 0,0:09:28.79,0:09:31.79,Default,,0000,0000,0000,,I know that was a mouthful --
Dialogue: 0,0:09:31.79,0:09:34.68,Default,,0000,0000,0000,,Let's take a look at this\Nin terms of a diagram.
Dialogue: 0,0:09:34.68,0:09:37.68,Default,,0000,0000,0000,,To help you along,\NI want you to fill in these tables.
Dialogue: 0,0:09:37.68,0:09:39.70,Default,,0000,0000,0000,,So our basic table
Dialogue: 0,0:09:39.70,0:09:42.70,Default,,0000,0000,0000,,from which you're going\Nto draw the information is up here.
Dialogue: 0,0:09:42.70,0:09:44.27,Default,,0000,0000,0000,,If both countries have\N24 units of labor,
Dialogue: 0,0:09:44.27,0:09:47.27,Default,,0000,0000,0000,,half devoted to computers,\Nhalf to shirts,
Dialogue: 0,0:09:47.27,0:09:49.40,Default,,0000,0000,0000,,there's no trade,
Dialogue: 0,0:09:49.40,0:09:52.40,Default,,0000,0000,0000,,so production is equal\Nto consumption
Dialogue: 0,0:09:52.40,0:09:53.94,Default,,0000,0000,0000,,in this first example --\Nwhat is production going to be?
Dialogue: 0,0:09:54.12,0:09:57.99,Default,,0000,0000,0000,,So Mexico, 12 units of labor\Nwith computers, 12 shirts.
Dialogue: 0,0:09:58.17,0:09:59.17,Default,,0000,0000,0000,,How many computers,\Nhow many shirts?
Dialogue: 0,0:09:59.17,0:10:00.44,Default,,0000,0000,0000,,Same for the United States.
Dialogue: 0,0:10:00.44,0:10:02.00,Default,,0000,0000,0000,,How many computers?\NHow many shirts?
Dialogue: 0,0:10:02.00,0:10:05.00,Default,,0000,0000,0000,,What's total world production?
Dialogue: 0,0:10:05.00,0:10:06.10,Default,,0000,0000,0000,,Then suppose\Nwe have specialization --
Dialogue: 0,0:10:06.10,0:10:09.10,Default,,0000,0000,0000,,what's production is going to be?
Dialogue: 0,0:10:09.10,0:10:14.43,Default,,0000,0000,0000,,So Mexico has zero units of labor\Nin computers, 24 in shirts.
Dialogue: 0,0:10:14.61,0:10:19.20,Default,,0000,0000,0000,,United States has 14 units of labor\Nin computers, 10 in shirts.
Dialogue: 0,0:10:19.38,0:10:22.19,Default,,0000,0000,0000,,What's production in each case?
Dialogue: 0,0:10:22.19,0:10:23.19,Default,,0000,0000,0000,,What is the total for the world?
Dialogue: 0,0:10:23.19,0:10:25.91,Default,,0000,0000,0000,,Then finally, can we --
Dialogue: 0,0:10:25.91,0:10:28.64,Default,,0000,0000,0000,,with production,\Nwith specialization,
Dialogue: 0,0:10:28.64,0:10:29.64,Default,,0000,0000,0000,,can we now find a way to have trade
Dialogue: 0,0:10:29.64,0:10:31.54,Default,,0000,0000,0000,,which makes both countries\Nbetter off?
Dialogue: 0,0:10:31.54,0:10:32.94,Default,,0000,0000,0000,,What's the exact,\Nor what's a exact price ratio
Dialogue: 0,0:10:32.94,0:10:35.94,Default,,0000,0000,0000,,at which that trade will occur?
Dialogue: 0,0:10:35.94,0:10:37.55,Default,,0000,0000,0000,,We'll take that up\Nin a later video.
Dialogue: 0,0:10:37.55,0:10:40.55,Default,,0000,0000,0000,,Let me just finally give you\Nsome concluding comments
Dialogue: 0,0:10:40.55,0:10:42.35,Default,,0000,0000,0000,,on comparative advantage.
Dialogue: 0,0:10:43.40,0:10:44.40,Default,,0000,0000,0000,,I want to conclude with a caution
Dialogue: 0,0:10:44.40,0:10:47.08,Default,,0000,0000,0000,,but also a big picture view\Nof comparative advantage.
Dialogue: 0,0:10:47.08,0:10:50.95,Default,,0000,0000,0000,,In the two country/person examples\NI've been working with
Dialogue: 0,0:10:51.13,0:10:53.42,Default,,0000,0000,0000,,in order to explain the theory,
Dialogue: 0,0:10:53.42,0:10:56.42,Default,,0000,0000,0000,,everyone is made\Nbetter off by trade.
Dialogue: 0,0:10:56.42,0:10:57.90,Default,,0000,0000,0000,,In larger examples, trade\Nwill increase aggregate wealth,
Dialogue: 0,0:10:57.90,0:11:00.90,Default,,0000,0000,0000,,but some individuals\Ncan be made worse off.
Dialogue: 0,0:11:00.90,0:11:03.45,Default,,0000,0000,0000,,And that should make perfect sense.
Dialogue: 0,0:11:03.45,0:11:06.45,Default,,0000,0000,0000,,After all, if A and B\Nhave been trading,
Dialogue: 0,0:11:06.45,0:11:08.08,Default,,0000,0000,0000,,and then because tariffs fall
Dialogue: 0,0:11:08.08,0:11:11.08,Default,,0000,0000,0000,,or because\Ntransportation costs fall,
Dialogue: 0,0:11:11.08,0:11:13.31,Default,,0000,0000,0000,,if A starts trading with C,\Nthen B may be worse off,
Dialogue: 0,0:11:13.31,0:11:16.31,Default,,0000,0000,0000,,even though A, B and C together\Nhave greater aggregate wealth.
Dialogue: 0,0:11:16.31,0:11:19.99,Default,,0000,0000,0000,,That's just a caution\Nto keep in mind.
Dialogue: 0,0:11:20.17,0:11:24.63,Default,,0000,0000,0000,,Now here's the big picture. Comparative\Nadvantage, it applies to people, to
Dialogue: 0,0:11:24.81,0:11:29.73,Default,,0000,0000,0000,,groups, to countries, and sometimes called\Nthe law of association. It's not only a
Dialogue: 0,0:11:29.91,0:11:34.73,Default,,0000,0000,0000,,beautiful theory. It's very positive and\Noptimistic theory because it says that we
Dialogue: 0,0:11:34.91,0:11:41.01,Default,,0000,0000,0000,,all have something to gain from trade. It\Nsays by working together, we can increase
Dialogue: 0,0:11:41.19,0:11:47.46,Default,,0000,0000,0000,,total wealth. More over we can-- I like to\Nphrase this in terms of a politically
Dialogue: 0,0:11:47.64,0:11:52.69,Default,,0000,0000,0000,,correct slogan. "Diversity is strength",\Nyou've probably heard that slogan before.
Dialogue: 0,0:11:52.87,0:11:58.23,Default,,0000,0000,0000,,What comparative advantage adds to this is\Nthat diversity and strength when combined
Dialogue: 0,0:11:58.41,0:12:04.09,Default,,0000,0000,0000,,with trade, its trade which turns\Ndiversity into strength.
Dialogue: 0,0:12:04.36,0:12:06.88,Default,,0000,0000,0000,,That's really the bottom line on\Ncomparative advantage.
Dialogue: 0,0:12:06.88,0:12:09.84,Default,,0000,0000,0000,,We'll be saying more in future videos.\NThanks.
Dialogue: 0,0:12:11.63,0:12:14.07,Default,,0000,0000,0000,,- If you want to test\Nyourself, click Practice Questions
Dialogue: 0,0:12:15.02,0:12:18.36,Default,,0000,0000,0000,,or if you're ready to move on,\Njust click Next Video.