1 00:00:00,000 --> 00:00:06,915 ♪ [music] ♪ 2 00:00:06,915 --> 00:00:13,830 - [Alex Tabarrok] In this talk I'm going to give you the answer 3 00:00:14,010 --> 00:00:17,097 to the homework question, so before you begin, 4 00:00:18,544 --> 00:00:19,544 make sure you've done your homework. 5 00:00:19,544 --> 00:00:22,027 No cheating. 6 00:00:22,027 --> 00:00:26,079 So remember our basic data is in the top figure right here, 7 00:00:26,079 --> 00:00:27,079 and we want to now answer 8 00:00:27,079 --> 00:00:29,663 supposing that there's 24 units of labor -- 9 00:00:29,663 --> 00:00:34,770 12 devoted to computers, 12 to shirts -- 10 00:00:34,950 --> 00:00:41,200 how many computers and shirts in Mexico? 11 00:00:41,380 --> 00:00:43,280 How many in the United States? 12 00:00:43,280 --> 00:00:46,280 Okay, well if Mexico devotes 12 units of labor 13 00:00:46,280 --> 00:00:48,720 to producing computers and it takes 12 units of labor 14 00:00:48,720 --> 00:00:49,720 to produce one computer, 15 00:00:49,720 --> 00:00:51,720 then you're going to get one computer. 16 00:00:51,720 --> 00:00:54,260 In Mexico it takes two units of labor 17 00:00:54,260 --> 00:00:57,260 to produce one shirt, 18 00:00:57,260 --> 00:01:02,560 so if you devote 12 units of labor to shirt production 19 00:01:02,740 --> 00:01:03,740 you're going to get six shirts. 20 00:01:03,740 --> 00:01:04,740 United States is even easier because it just takes 21 00:01:04,740 --> 00:01:06,973 one unit of labor to get one computer, 22 00:01:06,973 --> 00:01:09,206 one unit of labor to get one shirt. 23 00:01:09,206 --> 00:01:11,440 Therefore, if you devote 12 units of labor to computers, 24 00:01:11,620 --> 00:01:13,250 you get 12 computers, 25 00:01:13,250 --> 00:01:14,250 and if you devote 12 units of labor to shirts, 26 00:01:14,250 --> 00:01:16,250 you get 12 shirts. 27 00:01:16,250 --> 00:01:18,470 So the total world production of computers is 13 computers, 28 00:01:18,470 --> 00:01:21,470 and total world production of shirts is 18 shirts. 29 00:01:21,470 --> 00:01:25,870 Okay, now let's suppose that 30 00:01:25,870 --> 00:01:28,870 Mexico specializes, puts all of its labor, 31 00:01:28,870 --> 00:01:29,870 24 units of labor, into shirt production 32 00:01:29,870 --> 00:01:32,521 and zero into computer production. 33 00:01:32,521 --> 00:01:36,468 How many shirts and computers now? Well, clearly zero computers. 34 00:01:37,349 --> 00:01:43,400 Shirts: we now have 12 shirts, 24 units of labor, 35 00:01:43,580 --> 00:01:48,960 2 units of labor per shirts, so you get 12 shirts in total. 36 00:01:49,140 --> 00:01:52,380 What about the United States, which now devotes 37 00:01:52,380 --> 00:01:55,380 14 units of labor to computers, 10 to shirts. 38 00:01:55,380 --> 00:01:58,160 Again, because it's one unit of labor per computer, 39 00:01:58,160 --> 00:02:01,160 one unit of labor per shirt, then we simply get 14 and 10. 40 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 41 00:02:08,720 --> 00:02:13,690 shirts. So total world production is going up. We have more computers with 42 00:02:13,870 --> 00:02:19,340 specialization than we did when the two countries were not specialized and did not 43 00:02:19,520 --> 00:02:28,027 trade. Here we have 13 and 18. Now we've got 14 and 22, a big increase. Now notice 44 00:02:28,027 --> 00:02:33,964 how, however, that Mexico doesn't have many computers, okay. And the United States has 45 00:02:33,964 --> 00:02:40,613 fewer shirts than they did before. So is there a way to make both countries better 46 00:02:40,613 --> 00:02:45,537 off? Well, clearly since the total production has gone up there is. Let's 47 00:02:45,537 --> 00:02:50,811 take a look at how to do that. Here again is consumption with no trade. Here is 48 00:02:50,811 --> 00:02:56,578 production with specialization. Now suppose that the United States trades one 49 00:02:56,578 --> 00:03:01,183 computer to get three shirts. There are other possible trades which make both 50 00:03:01,183 --> 00:03:06,089 countries better off, but this is a nice simple one. So the United States trades 51 00:03:06,089 --> 00:03:11,939 one computer - remember it produced 14 - it trades one computer to Mexico, so United 52 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 53 00:03:17,258 --> 00:03:23,634 shirts so the United States used to have 10 shirts now it gets 13. Those extra 54 00:03:23,634 --> 00:03:29,385 three shirts come from Mexico which produce 12 but now Mexico only consumes 9. 55 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 56 00:03:34,582 --> 00:03:41,741 happened to consumption with specialization and trade compared to when 57 00:03:41,741 --> 00:03:46,805 there was no trade. So when there was no trade, Mexico consumes 1 computer and 6 58 00:03:46,805 --> 00:03:52,666 shirts, now they're consuming 1 computer and 9 shirts. So Mexico is better off by 59 00:03:52,666 --> 00:03:59,766 three shirts. The United States was consuming 12 computers and 12 shirts, now 60 00:03:59,766 --> 00:04:03,230 they're consuming 13 of each so they're better off. 61 00:04:03,230 --> 00:04:07,120 The United States is better off by one computer and better off by one shirt. 62 00:04:07,300 --> 00:04:12,150 Pretty remarkable. Trade according to Comparative Advantage has made both 63 00:04:12,330 --> 00:04:18,450 countries better off. One thing to keep in mind here is that Absolute Advantage, 64 00:04:18,630 --> 00:04:24,440 although it doesn't explain trade, it does explain how wealthy countries are. So even 65 00:04:24,620 --> 00:04:29,800 with trade, notice that Mexico is still considerably less wealthy than the United 66 00:04:29,980 --> 00:04:34,570 States, that is, total production of Mexico is one computer and nine shirts compared to 67 00:04:34,750 --> 00:04:40,720 the United States with 13 computers and 13 shirts. So Absolute Advantage does explain 68 00:04:40,900 --> 00:04:45,680 which countries in the world are rich or one of the aspects of which countries in 69 00:04:45,860 --> 00:04:51,480 the world are rich. But Comparative Advantage explains why it makes sense to 70 00:04:51,660 --> 00:04:56,330 trade and what goods it make sense to trade, and for more on this I invite you to take 71 00:04:56,510 --> 00:05:00,955 a look at my textbook with Tyler, Modern Principles of Economics. Thanks. 72 00:05:02,420 --> 00:05:05,304 If you want to test yourself click Practice Questions, 73 00:05:05,932 --> 00:05:09,487 or if you're ready to move on just click Next Video.