0:00:00.000,0:00:06.915 ♪ [music] ♪ 0:00:06.915,0:00:13.830 - [Alex Tabarrok] In this talk [br]I'm going to give you the answer 0:00:14.010,0:00:17.097 to the homework question, [br]so before you begin, 0:00:18.544,0:00:19.544 make sure you've done[br]your homework. 0:00:19.544,0:00:22.027 No cheating. 0:00:22.027,0:00:26.079 So remember our basic data [br]is in the top figure right here, 0:00:26.079,0:00:27.079 and we want to now answer 0:00:27.079,0:00:29.663 supposing that [br]there's 24 units of labor -- 0:00:29.663,0:00:34.770 12 devoted to computers, [br]12 to shirts -- 0:00:34.950,0:00:41.200 how many computers [br]and shirts in Mexico? 0:00:41.380,0:00:43.280 How many in the United States? 0:00:43.280,0:00:46.280 Okay, well if Mexico devotes [br]12 units of labor 0:00:46.280,0:00:48.720 to producing computers[br]and it takes 12 units of labor 0:00:48.720,0:00:49.720 to produce one computer, 0:00:49.720,0:00:51.720 then you're going to get [br]one computer. 0:00:51.720,0:00:54.260 In Mexico it takes [br]two units of labor 0:00:54.260,0:00:57.260 to produce one shirt, 0:00:57.260,0:01:02.560 so if you devote 12 units of labor [br]to shirt production 0:01:02.740,0:01:03.740 you're going to get six shirts. 0:01:03.740,0:01:04.740 United States is even easier [br]because it just takes 0:01:04.740,0:01:06.973 one unit of labor [br]to get one computer, 0:01:06.973,0:01:09.206 one unit of labor to get one shirt. 0:01:09.206,0:01:11.440 Therefore, if you devote [br]12 units of labor to computers, 0:01:11.620,0:01:13.250 you get 12 computers, 0:01:13.250,0:01:14.250 and if you devote [br]12 units of labor to shirts, 0:01:14.250,0:01:16.250 you get 12 shirts. 0:01:16.250,0:01:18.470 So the total world production [br]of computers is 13 computers, 0:01:18.470,0:01:21.470 and total world production [br]of shirts is 18 shirts. 0:01:21.470,0:01:25.870 Okay, now let's suppose that 0:01:25.870,0:01:28.870 Mexico specializes, [br]puts all of its labor, 0:01:28.870,0:01:29.870 24 units of labor, [br]into shirt production 0:01:29.870,0:01:32.521 and zero into computer production. 0:01:32.521,0:01:36.468 How many shirts and computers now?[br]Well, clearly zero computers. 0:01:37.349,0:01:43.400 Shirts: we now have 12 shirts,[br]24 units of labor, 0:01:43.580,0:01:48.960 2 units of labor per shirts, [br]so you get 12 shirts in total. 0:01:49.140,0:01:52.380 What about the United States, [br]which now devotes 0:01:52.380,0:01:55.380 14 units of labor to computers, [br]10 to shirts. 0:01:55.380,0:01:58.160 Again, because it's one unit [br]of labor per computer, 0:01:58.160,0:02:01.160 one unit of labor per shirt, [br]then we simply get 14 and 10. 0:02:01.160,0:02:08.539 Now here's the key, look at the totals. We[br]now have 14 computers, okay, and 22 0:02:08.720,0:02:13.690 shirts. So total world production is going[br]up. We have more computers with 0:02:13.870,0:02:19.340 specialization than we did when the two[br]countries were not specialized and did not 0:02:19.520,0:02:28.027 trade. Here we have 13 and 18. Now we've[br]got 14 and 22, a big increase. Now notice 0:02:28.027,0:02:33.964 how, however, that Mexico doesn't have many[br]computers, okay. And the United States has 0:02:33.964,0:02:40.613 fewer shirts than they did before. So is[br]there a way to make both countries better 0:02:40.613,0:02:45.537 off? Well, clearly since the total[br]production has gone up there is. Let's 0:02:45.537,0:02:50.811 take a look at how to do that. Here again[br]is consumption with no trade. Here is 0:02:50.811,0:02:56.578 production with specialization. Now[br]suppose that the United States trades one 0:02:56.578,0:03:01.183 computer to get three shirts. There are[br]other possible trades which make both 0:03:01.183,0:03:06.089 countries better off, but this is a nice[br]simple one. So the United States trades 0:03:06.089,0:03:11.939 one computer - remember it produced 14 - it[br]trades one computer to Mexico, so United 0:03:11.939,0:03:17.258 States now has 13, it gives one to Mexico,[br]and Mexico has one in return for three 0:03:17.258,0:03:23.634 shirts so the United States used to have[br]10 shirts now it gets 13. Those extra 0:03:23.634,0:03:29.385 three shirts come from Mexico which[br]produce 12 but now Mexico only consumes 9. 0:03:29.385,0:03:34.582 So now let's take a look. Total production[br]is the same, okay, but notice what has 0:03:34.582,0:03:41.741 happened to consumption with[br]specialization and trade compared to when 0:03:41.741,0:03:46.805 there was no trade. So when there was no[br]trade, Mexico consumes 1 computer and 6 0:03:46.805,0:03:52.666 shirts, now they're consuming 1 computer[br]and 9 shirts. So Mexico is better off by 0:03:52.666,0:03:59.766 three shirts. The United States was[br]consuming 12 computers and 12 shirts, now 0:03:59.766,0:04:03.230 they're consuming 13 of each so they're[br]better off. 0:04:03.230,0:04:07.120 The United States is better off by one[br]computer and better off by one shirt. 0:04:07.300,0:04:12.150 Pretty remarkable. Trade according to[br]Comparative Advantage has made both 0:04:12.330,0:04:18.450 countries better off. One thing to keep in[br]mind here is that Absolute Advantage, 0:04:18.630,0:04:24.440 although it doesn't explain trade, it does[br]explain how wealthy countries are. So even 0:04:24.620,0:04:29.800 with trade, notice that Mexico is still[br]considerably less wealthy than the United 0:04:29.980,0:04:34.570 States, that is, total production of Mexico[br]is one computer and nine shirts compared to 0:04:34.750,0:04:40.720 the United States with 13 computers and 13[br]shirts. So Absolute Advantage does explain 0:04:40.900,0:04:45.680 which countries in the world are rich or[br]one of the aspects of which countries in 0:04:45.860,0:04:51.480 the world are rich. But Comparative[br]Advantage explains why it makes sense to 0:04:51.660,0:04:56.330 trade and what goods it make sense to trade,[br]and for more on this I invite you to take 0:04:56.510,0:05:00.955 a look at my textbook with Tyler, Modern[br]Principles of Economics. Thanks. 0:05:02.420,0:05:05.304 If you want to test yourself click[br]Practice Questions, 0:05:05.932,0:05:09.487 or if you're ready to[br]move on just click Next Video.