1 00:00:09,090 --> 00:00:13,830 - In this talk I'm going to give you the answer to the homework question, so before 2 00:00:14,010 --> 00:00:17,097 you begin make sure you've done your homework, no cheating. 3 00:00:22,027 --> 00:00:26,079 So remember our basic data is in the top figure 4 00:00:26,079 --> 00:00:29,663 right here and we want to now answer suppose that there's 5 00:00:29,663 --> 00:00:34,770 24 units of labor, 12 devoted to computers, 12 to shirts, how many 6 00:00:34,950 --> 00:00:41,200 computers and shirts in Mexico? How many in the United States? Okay, well if Mexico 7 00:00:41,380 --> 00:00:46,100 devotes 12 units of labor to producing computers and it takes 12 units of labor 8 00:00:46,280 --> 00:00:51,540 to produce one computer then you're going to get one computer. In Mexico it takes 9 00:00:51,720 --> 00:00:57,080 two units of labor to produce one shirt, so if you devote 12 units of labor to 10 00:00:57,260 --> 00:01:02,560 shirt production you're going to get six shirts. United States even easier because 11 00:01:02,740 --> 00:01:06,480 it just takes one unit of labor to get one computer, one unit of labor to get one 12 00:01:06,660 --> 00:01:11,440 shirt, therefore if you devote 12 units of labor to computers you get 12 computers, 13 00:01:11,620 --> 00:01:16,070 and you devote 12 units of labor to shirts you get 12 shirts. So the total world 14 00:01:16,250 --> 00:01:21,290 production of computers is 13 computers and total world production of shirts is 18 15 00:01:21,470 --> 00:01:28,690 shirts. Okay, now let's suppose that Mexico specializes, puts all of its labor 16 00:01:28,870 --> 00:01:32,521 24 units of labor into shirt production and zero into computer production. 17 00:01:32,521 --> 00:01:36,468 How many shirts and computers now? Well, clearly zero computers 18 00:01:37,349 --> 00:01:43,400 shirts we now have 12 shirts, 24 units of labor, 2 units of labor per 19 00:01:43,580 --> 00:01:48,960 shirts so you get 12 shirts in total. What about the United States which now devotes 20 00:01:49,140 --> 00:01:55,200 14 units of labor to computers, 10 to shirts. Again because it's one unit of 21 00:01:55,380 --> 00:02:00,980 labor per computer, one unit of labor per shirt then we simply get 14 and 10. 22 00:02:01,160 --> 00:02:08,539 Now here's the key, look at the totals. We now have 14 computers, okay, and 22 23 00:02:08,720 --> 00:02:13,690 shirts. So total world production is going up. We have more computers with 24 00:02:13,870 --> 00:02:19,340 specialization than we did when the two countries were not specialize and did not 25 00:02:19,520 --> 00:02:28,027 trade, here we have 13 and 18. Now we've got 14 and 22, big increase. Now notice 26 00:02:28,027 --> 00:02:33,964 how however that Mexico doesn't have many computers, okay. And the United States has 27 00:02:33,964 --> 00:02:40,613 fewer shirts than they did before. So is there a way to make both countries better 28 00:02:40,613 --> 00:02:45,537 off? Well, clearly since the total production has gone up there is. Let's 29 00:02:45,537 --> 00:02:50,811 take a look at how to do that. Here again is a consumption with no trade, here is 30 00:02:50,811 --> 00:02:56,578 production with specialization, now suppose that the United States trades one 31 00:02:56,578 --> 00:03:01,183 computer to get three shirts. There are other possible trades which make both 32 00:03:01,183 --> 00:03:06,089 countries better off but this is a nice simple one. So the United States trades 33 00:03:06,089 --> 00:03:11,939 one computer, remember it produced 14, it trades one computer to Mexico so United 34 00:03:11,939 --> 00:03:17,258 States now has 13, it gives one to Mexico and Mexico has one in return for three 35 00:03:17,258 --> 00:03:23,634 shirts so the United States used to have 10 shirts now it gets 13. Those extra 36 00:03:23,634 --> 00:03:29,385 three shirts come from Mexico which produce 12 but now Mexico only consumes 9. 37 00:03:29,385 --> 00:03:34,582 So now let's take a look. Total production is the same, okay, but notice what has 38 00:03:34,582 --> 00:03:41,741 happened to consumption with specialization and trade compared to when 39 00:03:41,741 --> 00:03:46,805 there was no trade. So when there was no trade Mexico consumes 1 computer and 6 40 00:03:46,805 --> 00:03:52,666 shirts, now they're consuming 1 computer and 9 shirts. So Mexico is better off by 41 00:03:52,666 --> 00:03:59,766 three shirts. The United States was consuming 12 computers and 12 shirts, now 42 00:03:59,766 --> 00:04:03,230 they're consuming 13 of each so they're better off. 43 00:04:03,230 --> 00:04:07,120 The United States is better off by one computer and better off by one shirt. 44 00:04:07,300 --> 00:04:12,150 Pretty remarkable. Trade according to Comparative Advantage has made both 45 00:04:12,330 --> 00:04:18,450 countries better off. One thing to keep in mind here is that Absolute Advantage 46 00:04:18,630 --> 00:04:24,440 although it doesn't explain trade it does explain how wealthy countries are. So even 47 00:04:24,620 --> 00:04:29,800 with trade notice than Mexico is still considerably less wealthy than the United 48 00:04:29,980 --> 00:04:34,570 States that its total production of Mexico is one computer at nine shirts compare to 49 00:04:34,750 --> 00:04:40,720 the United States with 13 computers and 13 shirts. So Absolute Advantage does explain 50 00:04:40,900 --> 00:04:45,680 which countries in the world are rich or one of the aspects of which countries in 51 00:04:45,860 --> 00:04:51,480 the world are rich. But Comparative Advantage explains why it makes sense to 52 00:04:51,660 --> 00:04:56,330 trade and what good it make sense to trade and for more on this I invite you to take 53 00:04:56,510 --> 00:05:00,955 a look at my textbook with Tyler, Modern Principles of Economics. Thanks. 54 00:05:02,420 --> 00:05:05,304 If you want to test yourself click Practice Questions, 55 00:05:05,932 --> 00:05:09,487 or if you're ready to move on just click Next Video.