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♪ [music] ♪

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- [Alex Tabarrok] In this talk 
I'm going to give you the answer

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to the homework question, 
so before you begin,

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make sure you've done
your homework.

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No cheating.

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So remember our basic data 
is in the top figure right here,

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and we want to now answer

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suppose that there's 
24 units of labor --

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12 devoted to computers, 
12 to shirts --

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how many computers 
and shirts in Mexico?

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How many in the United States?

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Okay, well if Mexico devotes 
12 units of labor

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to producing computers
and it takes 12 units of labor

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to produce one computer,

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then you're going to get 
one computer.

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In Mexico it takes 
two units of labor

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to produce one shirt,

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so if you devote 12 units of labor 
to shirt production

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you're going to get six shirts.

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United States is even easier 
because it just takes

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one unit of labor 
to get one computer,

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one unit of labor to get one shirt.

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Therefore, if you devote 
12 units of labor to computers,

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you get 12 computers,

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and if you devote 
12 units of labor to shirts,

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you get 12 shirts.

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So the total world production 
of computers is 13 computers,

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and total world production 
of shirts is 18 shirts.

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Okay, now let's suppose that

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Mexico specializes, 
puts all of its labor,

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24 units of labor, 
into shirt production

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and zero into computer production.

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How many shirts and computers now?
Well, clearly zero computers.

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Shirts, we now have 12 shirts,
24 units of labor,

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two units of labor per shirts, 
so you get 12 shirts in total.

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What about the United States, 
which now devotes

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14 units of labor to computers, 
10 to shirts.

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Again, because it's one unit 
of labor per computer,

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one unit of labor per shirt, 
then we simply get 14 and 10.

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Now here's the key, 
look at the totals.

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We now have 14 computers
and 22 shirts.

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So total world production 
has gone up.

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We have more computers 
with specialization

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than we did when the two countries

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were not specialized 
and did not trade.

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Here we have 13 and 18.

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Now we've got 14 and 22, 
a big increase.

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Now notice how, however,

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that Mexico doesn't have 
any computers.

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And the United States has 
fewer shirts than they did before.

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So is there a way 
to make both countries better off?

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Well, clearly since 


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the total production 
has gone up there is.

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Let's take a look at how to do that. 


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Here again is consumption 
with no trade.

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Here is production 
with specialization.

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Now suppose that the United States

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trades one computer 
to get three shirts.

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There are other possible trades

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which make both countries 
better off,

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but this is a nice simple one.

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So the United States 
trades one computer --

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remember it produced 14 --

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it trades one computer to Mexico, 
so United States now has 13,

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it gives one to Mexico,
and Mexico has one 
in return for three shirts

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so the United States used to have 
10 shirts now it gets 13.

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Those extra three shirts 
come from Mexico

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which produce 12 
but now Mexico only consumes nine.

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So now let's take a look.

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Total production is the same, okay,

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but notice what has happened

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to consumption with 
specialization and trade

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compared to when there was no trade.

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So when there was no trade, 
Mexico consumes one computer and six

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shirts, now they're consuming 
one computer and nine shirts.

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So Mexico is better off 
by three shirts.

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The United States was consuming 
12 computers and 12 shirts,

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now they're consuming 13 of each 
so they're better off.

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The United States is better off 
by one computer

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and better off by one shirt.

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Pretty remarkable.

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Trade according 
to Comparative Advantage

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has made both countries 
better off.

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One thing to keep in mind here 
is that Absolute Advantage,

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although it doesn't explain trade,

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it does explain 
how wealthy countries are.

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So even with trade, notice that 
Mexico is still considerably

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less wealthy than the United States,

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that is, total production of Mexico
is one computer and nine shirts

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compared to the United States 
with 13 computers and 13 shirts.

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So Absolute Advantage does explain 
which countries in the world

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are rich or one of the aspects 


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of which countries 
in the world are rich.

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But Comparative Advantage explains 
why it makes sense to trade

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and what goods 
it make sense to trade,

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and for more on this I invite you 
to take a look at my textbook

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with Tyler, Modern Principles 
of Economics. 


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Thanks.

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If you want to test yourself 
click "Practice Questions,"

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or if you're ready to
move on just click "Next Video."

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♪ [music] ♪