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. 0:02:01.160,0:02:05.720 Now here's the key, [br]look at the totals. 0:02:05.720,0:02:08.720 We now have 14 computers, [br]okay, and 22 shirts. 0:02:08.720,0:02:13.690 So total world production [br]is going up. 0:02:13.870,0:02:16.520 We have more computers [br]with specialization 0:02:16.520,0:02:17.520 than we did when the two countries 0:02:17.520,0:02:19.520 were not specialized [br]and did not trade. 0:02:19.520,0:02:25.027 Here we have 13 and 18. 0:02:25.027,0:02:28.027 Now we've got 14 and 22, [br]a big increase. 0:02:28.027,0:02:30.964 Now notice how, however, 0:02:30.964,0:02:33.964 that Mexico doesn't have [br]many computers. 0:02:33.964,0:02:37.613 And the United States has [br]fewer shirts than they did before. 0:02:37.613,0:02:40.613 So is there a way [br]to make both countries better off? 0:02:40.613,0:02:42.537 Well, clearly since [br] 0:02:42.537,0:02:45.537 the total production [br]has gone up there is. 0:02:45.537,0:02:47.811 Let's take a look at how to do that. [br] 0:02:47.811,0:02:50.811 Here again is consumption [br]with no trade. 0:02:50.811,0:02:56.578 Here is production [br]with specialization. 0:02:56.578,0:02:58.183 Now suppose that the United States 0:02:58.183,0:02:59.183 trades one computer [br]to get three shirts. 0:02:59.183,0:03:01.485 There are other possible trades 0:03:01.485,0:03:03.787 which make both countries [br]better off, 0:03:03.787,0:03:06.089 but this is a nice simple one. 0:03:06.089,0:03:08.939 So the United States [br]trades one computer -- 0:03:08.939,0:03:11.939 remember it produced 14 -- 0:03:11.939,0:03:14.258 it trades one computer to Mexico, [br]so United States now has 13, 0:03:14.258,0:03:17.258 it gives one to Mexico,[br]and Mexico has one [br]in return for three shirts 0:03:17.258,0:03:23.634 so the United States used to have [br]10 shirts now it gets 13. 0:03:23.634,0:03:26.385 Those extra three shirts [br]come from Mexico 0:03:26.385,0:03:29.385 which produce 12 [br]but now Mexico only consumes nine. 0:03:29.385,0:03:31.582 So now let's take a look. 0:03:34.582,0:03:38.741 Total production is the same, okay, 0:03:38.741,0:03:39.741 but notice what has happened 0:03:39.741,0:03:41.741 to consumption with [br]specialization and trade 0:03:41.741,0:03:43.805 compared to when there was no trade. 0:03:43.805,0:03:46.805 So when there was no trade, [br]Mexico consumes one computer and six 0:03:46.805,0:03:52.666 shirts, now they're consuming [br]one computer and nine shirts. 0:03:52.666,0:03:59.766 So Mexico is better off by 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.