WEBVTT 00:00:00.000 --> 00:00:06.915 ♪ [music] ♪ 00:00:06.915 --> 00:00:13.830 - [Alex Tabarrok] In this talk I'm going to give you the answer 00:00:14.010 --> 00:00:17.097 to the homework question, so before you begin, 00:00:18.544 --> 00:00:19.544 make sure you've done your homework. 00:00:19.544 --> 00:00:22.027 No cheating. 00:00:22.027 --> 00:00:26.079 So remember our basic data is in the top figure right here, 00:00:26.079 --> 00:00:27.079 and we want to now answer 00:00:27.079 --> 00:00:29.663 supposing that there's 24 units of labor -- 00:00:29.663 --> 00:00:34.770 12 devoted to computers, 12 to shirts -- 00:00:34.950 --> 00:00:41.200 how many computers and shirts in Mexico? 00:00:41.380 --> 00:00:43.280 How many in the United States? 00:00:43.280 --> 00:00:46.280 Okay, well if Mexico devotes 12 units of labor 00:00:46.280 --> 00:00:48.720 to producing computers and it takes 12 units of labor 00:00:48.720 --> 00:00:49.720 to produce one computer, 00:00:49.720 --> 00:00:51.720 then you're going to get one computer. 00:00:51.720 --> 00:00:54.260 In Mexico it takes two units of labor 00:00:54.260 --> 00:00:57.260 to produce one shirt, 00:00:57.260 --> 00:01:02.560 so if you devote 12 units of labor to shirt production 00:01:02.740 --> 00:01:03.740 you're going to get six shirts. 00:01:03.740 --> 00:01:04.740 United States is even easier because it just takes 00:01:04.740 --> 00:01:06.973 one unit of labor to get one computer, 00:01:06.973 --> 00:01:09.206 one unit of labor to get one shirt. 00:01:09.206 --> 00:01:11.440 Therefore, if you devote 12 units of labor to computers, 00:01:11.620 --> 00:01:13.250 you get 12 computers, 00:01:13.250 --> 00:01:14.250 and if you devote 12 units of labor to shirts, 00:01:14.250 --> 00:01:16.250 you get 12 shirts. 00:01:16.250 --> 00:01:18.470 So the total world production of computers is 13 computers, 00:01:18.470 --> 00:01:21.470 and total world production of shirts is 18 shirts. 00:01:21.470 --> 00:01:25.870 Okay, now let's suppose that 00:01:25.870 --> 00:01:28.870 Mexico specializes, puts all of its labor, 00:01:28.870 --> 00:01:29.870 24 units of labor, into shirt production 00:01:29.870 --> 00:01:32.521 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, NOTE Paragraph 00:01:43.580 --> 00:01:48.960 2 units of labor per shirts, so you get 12 shirts in total. 00:01:49.140 --> 00:01:52.380 What about the United States, which now devotes 00:01:52.380 --> 00:01:55.380 14 units of labor to computers, 10 to shirts. 00:01:55.380 --> 00:01:58.160 Again, because it's one unit of labor per computer, 00:01:58.160 --> 00:02:01.160 one unit of labor per shirt, then we simply get 14 and 10. 00:02:01.160 --> 00:02:05.720 Now here's the key, look at the totals. 00:02:05.720 --> 00:02:08.720 We now have 14 computers, okay, and 22 shirts. 00:02:08.720 --> 00:02:13.690 So total world production is going up. 00:02:13.870 --> 00:02:16.520 We have more computers with specialization 00:02:16.520 --> 00:02:17.520 than we did when the two countries 00:02:17.520 --> 00:02:19.520 were not specialized and did not trade. 00:02:19.520 --> 00:02:25.027 Here we have 13 and 18. 00:02:25.027 --> 00:02:28.027 Now we've got 14 and 22, a big increase. 00:02:28.027 --> 00:02:30.964 Now notice how, however, 00:02:30.964 --> 00:02:33.964 that Mexico doesn't have many computers. 00:02:33.964 --> 00:02:37.613 And the United States has fewer shirts than they did before. 00:02:37.613 --> 00:02:40.613 So is there a way to make both countries better off? 00:02:40.613 --> 00:02:42.537 Well, clearly since 00:02:42.537 --> 00:02:45.537 the total production has gone up there is. 00:02:45.537 --> 00:02:47.811 Let's take a look at how to do that. 00:02:47.811 --> 00:02:50.811 Here again is consumption with no trade. 00:02:50.811 --> 00:02:56.578 Here is production with specialization. 00:02:56.578 --> 00:02:58.183 Now suppose that the United States 00:02:58.183 --> 00:02:59.183 trades one computer to get three shirts. 00:02:59.183 --> 00:03:01.183 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 that Mexico is still considerably less wealthy than the United 00:04:29.980 --> 00:04:34.570 States, that is, total production of Mexico is one computer and nine shirts compared 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 goods 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.