- In this talk I'm going to give you the answer to the homework question, so before
you begin make sure you've done your homework, no cheating.
So remember our basic data is in the top figure
right here and we want to now answer suppose that there's
24 units of labor, 12 devoted to computers, 12 to shirts, how many
computers and shirts in Mexico? How many in the United States? Okay, well if Mexico
devotes 12 units of labor to producing computers and it takes 12 units of labor
to produce one computer then you're going to get one computer. In Mexico it takes
two units of labor to produce one shirt, so if you devote 12 units of labor to
shirt production you're going to get six shirts. United States even easier because
it just takes one unit of labor to get one computer, one unit of labor to get one
shirt, therefore if you devote 12 units of labor to computers you get 12 computers,
and you devote 12 units of labor to shirts you get 12 shirts. So the total world
production of computers is 13 computers and total world production of shirts is 18
shirts. Okay, now let's suppose that Mexico specializes, puts all of its labor
24 units of labor into shirt production and zero into computer production.
How many shirts and computers now? Well, clearly zero computers
shirts we now have 12 shirts, 24 units of labor, 2 units of labor per
shirts so you get 12 shirts in total. What about the United States which now devotes
14 units of labor to computers, 10 to shirts. Again because it's one unit of
labor per computer, one unit of labor per shirt then we simply get 14 and 10.
Now here's the key, look at the totals. We now have 14 computers, okay, and 22
shirts. So total world production is going up. We have more computers with
specialization than we did when the two countries were not specialize and did not
trade, here we have 13 and 18. Now we've got 14 and 22, big increase. Now notice
how however that Mexico doesn't have many computers, okay. And the United States has
fewer shirts than they did before. So is there a way to make both countries better
off? Well, clearly since the total production has gone up there is. Let's
take a look at how to do that. Here again is a consumption with no trade, here is
production with specialization, now suppose that the United States trades one
computer to get three shirts. There are other possible trades which make both
countries better off but this is a nice simple one. So the United States trades
one computer, remember it produced 14, it trades one computer to Mexico so United
States now has 13, it gives one to Mexico and Mexico has one in return for three
shirts so the United States used to have 10 shirts now it gets 13. Those extra
three shirts come from Mexico which produce 12 but now Mexico only consumes 9.
So now let's take a look. Total production is the same, okay, but notice what has
happened to consumption with specialization and trade compared to when
there was no trade. So when there was no trade Mexico consumes 1 computer and 6
shirts, now they're consuming 1 computer and 9 shirts. So Mexico is better off by
three shirts. The United States was consuming 12 computers and 12 shirts, now
they're consuming 13 of each so they're better off.
The United States is better off by one computer and better off by one shirt.
Pretty remarkable. Trade according to Comparative Advantage has made both
countries better off. One thing to keep in mind here is that Absolute Advantage
although it doesn't explain trade it does explain how wealthy countries are. So even
with trade notice than Mexico is still considerably less wealthy than the United
States that its total production of Mexico is one computer at nine shirts compare to
the United States with 13 computers and 13 shirts. So Absolute Advantage does explain
which countries in the world are rich or one of the aspects of which countries in
the world are rich. But Comparative Advantage explains why it makes sense to
trade and what good it make sense to trade and for more on this I invite you to take
a look at my textbook with Tyler, Modern Principles of Economics. Thanks.
If you want to test yourself click Practice Questions,
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