WEBVTT 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 00:00:14.010 --> 00:00:17.097 you begin make sure you've done your homework, no cheating. 00:00:22.027 --> 00:00:26.079 So remember our basic data is in the top figure 00:00:26.079 --> 00:00:29.663 right here and we want to now answer suppose that there's 00:00:29.663 --> 00:00:34.770 24 units of labor, 12 devoted to computers, 12 to shirts, how many 00:00:34.950 --> 00:00:41.200 computers and shirts in Mexico? How many in the United States? Okay, well if Mexico 00:00:41.380 --> 00:00:46.100 devotes 12 units of labor to producing computers and it takes 12 units of labor 00:00:46.280 --> 00:00:51.540 to produce one computer then you're going to get one computer. In Mexico it takes 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 00:00:57.260 --> 00:01:02.560 shirt production you're going to get six shirts. United States even easier because 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 00:01:06.660 --> 00:01:11.440 shirt, therefore if you devote 12 units of labor to computers you get 12 computers, 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 00:01:16.250 --> 00:01:21.290 production of computers is 13 computers and total world production of shirts is 18 00:01:21.470 --> 00:01:28.690 shirts. Okay, now let's suppose that Mexico specializes, puts all of its labor 00:01:28.870 --> 00:01:32.521 24 units of labor into shirt production and zero into computer production. 00:01:32.521 --> 00:01:36.468 How many shirts and computers now? Well, clearly zero computers 00:01:37.349 --> 00:01:43.400 shirts we now have 12 shirts, 24 units of labor, 2 units of labor per 00:01:43.580 --> 00:01:48.960 shirts so you get 12 shirts in total. What about the United States which now devotes 00:01:49.140 --> 00:01:55.200 14 units of labor to computers, 10 to shirts. Again because it's one unit of 00:01:55.380 --> 00:02:00.980 labor per computer, one unit of labor per shirt then we simply get 14 and 10. 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 00:02:08.720 --> 00:02:13.690 shirts. So total world production is going up. We have more computers with 00:02:13.870 --> 00:02:19.340 specialization than we did when the two countries were not specialize and did not 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 00:02:28.027 --> 00:02:33.964 how however that Mexico doesn't have many computers, okay. And the United States has 00:02:33.964 --> 00:02:40.613 fewer shirts than they did before. So is there a way to make both countries better 00:02:40.613 --> 00:02:45.537 off? Well, clearly since the total production has gone up there is. Let's 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 00:02:50.811 --> 00:02:56.578 production with specialization, now suppose that the United States trades one 00:02:56.578 --> 00:03:01.183 computer to get three shirts. There are other possible trades which make both 00:03:01.183 --> 00:03:06.089 countries better off but this is a nice simple one. So the United States trades 00:03:06.089 --> 00:03:11.939 one computer, remember it produced 14, it trades one computer to Mexico so United 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 00:03:17.258 --> 00:03:23.634 shirts so the United States used to have 10 shirts now it gets 13. Those extra 00:03:23.634 --> 00:03:29.385 three shirts come from Mexico which produce 12 but now Mexico only consumes 9. 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 00:03:34.582 --> 00:03:41.741 happened to consumption with specialization and trade compared to when 00:03:41.741 --> 00:03:46.805 there was no trade. So when there was no trade Mexico consumes 1 computer and 6 00:03:46.805 --> 00:03:52.666 shirts, now they're consuming 1 computer and 9 shirts. So Mexico is better off by 00:03:52.666 --> 00:03:59.766 three shirts. The United States was consuming 12 computers and 12 shirts, now 00:03:59.766 --> 00:04:03.230 they're consuming 13 of each so they're better off. 00:04:03.230 --> 00:04:07.120 The United States is better off by one computer and better off by one shirt. 00:04:07.300 --> 00:04:12.150 Pretty remarkable. Trade according to Comparative Advantage has made both 00:04:12.330 --> 00:04:18.450 countries better off. One thing to keep in mind here is that Absolute Advantage 00:04:18.630 --> 00:04:24.440 although it doesn't explain trade it does explain how wealthy countries are. So even 00:04:24.620 --> 00:04:29.800 with trade notice than Mexico is still considerably less wealthy than the United 00:04:29.980 --> 00:04:34.570 States that its total production of Mexico is one computer at nine shirts compare to 00:04:34.750 --> 00:04:40.720 the United States with 13 computers and 13 shirts. So Absolute Advantage does explain 00:04:40.900 --> 00:04:45.680 which countries in the world are rich or one of the aspects of which countries in 00:04:45.860 --> 00:04:51.480 the world are rich. But Comparative Advantage explains why it makes sense to 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 00:04:56.510 --> 00:05:00.955 a look at my textbook with Tyler, Modern Principles of Economics. Thanks. 00:05:02.420 --> 00:05:05.304 If you want to test yourself click Practice Questions, 00:05:05.932 --> 00:05:09.487 or if you're ready to move on just click Next Video.