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Dialogue: 0,0:00:00.00,0:00:06.92,Default,,0000,0000,0000,,♪ [music] ♪
Dialogue: 0,0:00:06.92,0:00:13.83,Default,,0000,0000,0000,,- [Alex Tabarrok] In this talk \NI'm going to give you the answer
Dialogue: 0,0:00:14.01,0:00:17.10,Default,,0000,0000,0000,,to the homework question, \Nso before you begin,
Dialogue: 0,0:00:18.54,0:00:19.54,Default,,0000,0000,0000,,make sure you've done\Nyour homework.
Dialogue: 0,0:00:19.54,0:00:22.03,Default,,0000,0000,0000,,No cheating.
Dialogue: 0,0:00:22.03,0:00:26.08,Default,,0000,0000,0000,,So remember our basic data \Nis in the top figure right here,
Dialogue: 0,0:00:26.08,0:00:27.08,Default,,0000,0000,0000,,and we want to now answer
Dialogue: 0,0:00:27.08,0:00:29.66,Default,,0000,0000,0000,,supposing that \Nthere's 24 units of labor --
Dialogue: 0,0:00:29.66,0:00:34.77,Default,,0000,0000,0000,,12 devoted to computers, \N12 to shirts --
Dialogue: 0,0:00:34.95,0:00:41.20,Default,,0000,0000,0000,,how many computers \Nand shirts in Mexico?
Dialogue: 0,0:00:41.38,0:00:43.28,Default,,0000,0000,0000,,How many in the United States?
Dialogue: 0,0:00:43.28,0:00:46.28,Default,,0000,0000,0000,,Okay, well if Mexico devotes \N12 units of labor
Dialogue: 0,0:00:46.28,0:00:48.72,Default,,0000,0000,0000,,to producing computers\Nand it takes 12 units of labor
Dialogue: 0,0:00:48.72,0:00:49.72,Default,,0000,0000,0000,,to produce one computer,
Dialogue: 0,0:00:49.72,0:00:51.72,Default,,0000,0000,0000,,then you're going to get \None computer.
Dialogue: 0,0:00:51.72,0:00:54.26,Default,,0000,0000,0000,,In Mexico it takes \Ntwo units of labor
Dialogue: 0,0:00:54.26,0:00:57.26,Default,,0000,0000,0000,,to produce one shirt,
Dialogue: 0,0:00:57.26,0:01:02.56,Default,,0000,0000,0000,,so if you devote 12 units of labor \Nto shirt production
Dialogue: 0,0:01:02.74,0:01:03.74,Default,,0000,0000,0000,,you're going to get six shirts.
Dialogue: 0,0:01:03.74,0:01:04.74,Default,,0000,0000,0000,,United States is even easier \Nbecause it just takes
Dialogue: 0,0:01:04.74,0:01:06.97,Default,,0000,0000,0000,,one unit of labor \Nto get one computer,
Dialogue: 0,0:01:06.97,0:01:09.21,Default,,0000,0000,0000,,one unit of labor to get one shirt.
Dialogue: 0,0:01:09.21,0:01:11.44,Default,,0000,0000,0000,,Therefore, if you devote \N12 units of labor to computers,
Dialogue: 0,0:01:11.62,0:01:13.25,Default,,0000,0000,0000,,you get 12 computers,
Dialogue: 0,0:01:13.25,0:01:14.25,Default,,0000,0000,0000,,and if you devote \N12 units of labor to shirts,
Dialogue: 0,0:01:14.25,0:01:16.25,Default,,0000,0000,0000,,you get 12 shirts.
Dialogue: 0,0:01:16.25,0:01:18.47,Default,,0000,0000,0000,,So the total world production \Nof computers is 13 computers,
Dialogue: 0,0:01:18.47,0:01:21.47,Default,,0000,0000,0000,,and total world production \Nof shirts is 18 shirts.
Dialogue: 0,0:01:21.47,0:01:25.87,Default,,0000,0000,0000,,Okay, now let's suppose that
Dialogue: 0,0:01:25.87,0:01:28.87,Default,,0000,0000,0000,,Mexico specializes, \Nputs all of its labor,
Dialogue: 0,0:01:28.87,0:01:29.87,Default,,0000,0000,0000,,24 units of labor, \Ninto shirt production
Dialogue: 0,0:01:29.87,0:01:32.52,Default,,0000,0000,0000,,and zero into computer production.
Dialogue: 0,0:01:32.52,0:01:36.47,Default,,0000,0000,0000,,How many shirts and computers now?\NWell, clearly zero computers.
Dialogue: 0,0:01:37.35,0:01:43.40,Default,,0000,0000,0000,,Shirts: we now have 12 shirts,\N24 units of labor,
Dialogue: 0,0:01:43.58,0:01:48.96,Default,,0000,0000,0000,,2 units of labor per shirts, \Nso you get 12 shirts in total.
Dialogue: 0,0:01:49.14,0:01:52.38,Default,,0000,0000,0000,,What about the United States, \Nwhich now devotes
Dialogue: 0,0:01:52.38,0:01:55.38,Default,,0000,0000,0000,,14 units of labor to computers, \N10 to shirts.
Dialogue: 0,0:01:55.38,0:01:58.16,Default,,0000,0000,0000,,Again, because it's one unit \Nof labor per computer,
Dialogue: 0,0:01:58.16,0:02:01.16,Default,,0000,0000,0000,,one unit of labor per shirt, \Nthen we simply get 14 and 10.
Dialogue: 0,0:02:01.16,0:02:05.72,Default,,0000,0000,0000,,Now here's the key, \Nlook at the totals.
Dialogue: 0,0:02:05.72,0:02:08.72,Default,,0000,0000,0000,,We now have 14 computers, \Nokay, and 22 shirts.
Dialogue: 0,0:02:08.72,0:02:13.69,Default,,0000,0000,0000,,So total world production \Nis going up.
Dialogue: 0,0:02:13.87,0:02:16.52,Default,,0000,0000,0000,,We have more computers \Nwith specialization
Dialogue: 0,0:02:16.52,0:02:17.52,Default,,0000,0000,0000,,than we did when the two countries
Dialogue: 0,0:02:17.52,0:02:19.52,Default,,0000,0000,0000,,were not specialized \Nand did not trade.
Dialogue: 0,0:02:19.52,0:02:25.03,Default,,0000,0000,0000,,Here we have 13 and 18.
Dialogue: 0,0:02:25.03,0:02:28.03,Default,,0000,0000,0000,,Now we've got 14 and 22, \Na big increase.
Dialogue: 0,0:02:28.03,0:02:30.96,Default,,0000,0000,0000,,Now notice how, however,
Dialogue: 0,0:02:30.96,0:02:33.96,Default,,0000,0000,0000,,that Mexico doesn't have \Nmany computers.
Dialogue: 0,0:02:33.96,0:02:37.61,Default,,0000,0000,0000,,And the United States has \Nfewer shirts than they did before.
Dialogue: 0,0:02:37.61,0:02:40.61,Default,,0000,0000,0000,,So is there a way \Nto make both countries better off?
Dialogue: 0,0:02:40.61,0:02:42.54,Default,,0000,0000,0000,,Well, clearly since \N
Dialogue: 0,0:02:42.54,0:02:45.54,Default,,0000,0000,0000,,the total production \Nhas gone up there is.
Dialogue: 0,0:02:45.54,0:02:47.81,Default,,0000,0000,0000,,Let's take a look at how to do that. \N
Dialogue: 0,0:02:47.81,0:02:50.81,Default,,0000,0000,0000,,Here again is consumption \Nwith no trade.
Dialogue: 0,0:02:50.81,0:02:56.58,Default,,0000,0000,0000,,Here is production \Nwith specialization.
Dialogue: 0,0:02:56.58,0:02:58.18,Default,,0000,0000,0000,,Now suppose that the United States
Dialogue: 0,0:02:58.18,0:02:59.18,Default,,0000,0000,0000,,trades one computer \Nto get three shirts.
Dialogue: 0,0:02:59.18,0:03:01.48,Default,,0000,0000,0000,,There are other possible trades
Dialogue: 0,0:03:01.48,0:03:03.79,Default,,0000,0000,0000,,which make both countries \Nbetter off,
Dialogue: 0,0:03:03.79,0:03:06.09,Default,,0000,0000,0000,,but this is a nice simple one.
Dialogue: 0,0:03:06.09,0:03:08.94,Default,,0000,0000,0000,,So the United States \Ntrades one computer --
Dialogue: 0,0:03:08.94,0:03:11.94,Default,,0000,0000,0000,,remember it produced 14 --
Dialogue: 0,0:03:11.94,0:03:14.26,Default,,0000,0000,0000,,it trades one computer to Mexico, \Nso United States now has 13,
Dialogue: 0,0:03:14.26,0:03:17.26,Default,,0000,0000,0000,,it gives one to Mexico,\Nand Mexico has one \Nin return for three shirts
Dialogue: 0,0:03:17.26,0:03:23.63,Default,,0000,0000,0000,,so the United States used to have \N10 shirts now it gets 13.
Dialogue: 0,0:03:23.63,0:03:26.38,Default,,0000,0000,0000,,Those extra three shirts \Ncome from Mexico
Dialogue: 0,0:03:26.38,0:03:29.38,Default,,0000,0000,0000,,which produce 12 \Nbut now Mexico only consumes nine.
Dialogue: 0,0:03:29.38,0:03:31.58,Default,,0000,0000,0000,,So now let's take a look.
Dialogue: 0,0:03:34.58,0:03:38.74,Default,,0000,0000,0000,,Total production is the same, okay,
Dialogue: 0,0:03:38.74,0:03:39.74,Default,,0000,0000,0000,,but notice what has happened
Dialogue: 0,0:03:39.74,0:03:41.74,Default,,0000,0000,0000,,to consumption with \Nspecialization and trade
Dialogue: 0,0:03:41.74,0:03:43.80,Default,,0000,0000,0000,,compared to when there was no trade.
Dialogue: 0,0:03:43.80,0:03:46.80,Default,,0000,0000,0000,,So when there was no trade, \NMexico consumes one computer and six
Dialogue: 0,0:03:46.80,0:03:52.67,Default,,0000,0000,0000,,shirts, now they're consuming \None computer and nine shirts.
Dialogue: 0,0:03:52.67,0:03:59.77,Default,,0000,0000,0000,,So Mexico is better off by three shirts. The United States was\Nconsuming 12 computers and 12 shirts, now
Dialogue: 0,0:03:59.77,0:04:03.23,Default,,0000,0000,0000,,they're consuming 13 of each so they're\Nbetter off.
Dialogue: 0,0:04:03.23,0:04:07.12,Default,,0000,0000,0000,,The United States is better off by one\Ncomputer and better off by one shirt.
Dialogue: 0,0:04:07.30,0:04:12.15,Default,,0000,0000,0000,,Pretty remarkable. Trade according to\NComparative Advantage has made both
Dialogue: 0,0:04:12.33,0:04:18.45,Default,,0000,0000,0000,,countries better off. One thing to keep in\Nmind here is that Absolute Advantage,
Dialogue: 0,0:04:18.63,0:04:24.44,Default,,0000,0000,0000,,although it doesn't explain trade, it does\Nexplain how wealthy countries are. So even
Dialogue: 0,0:04:24.62,0:04:29.80,Default,,0000,0000,0000,,with trade, notice that Mexico is still\Nconsiderably less wealthy than the United
Dialogue: 0,0:04:29.98,0:04:34.57,Default,,0000,0000,0000,,States, that is, total production of Mexico\Nis one computer and nine shirts compared to
Dialogue: 0,0:04:34.75,0:04:40.72,Default,,0000,0000,0000,,the United States with 13 computers and 13\Nshirts. So Absolute Advantage does explain
Dialogue: 0,0:04:40.90,0:04:45.68,Default,,0000,0000,0000,,which countries in the world are rich or\None of the aspects of which countries in
Dialogue: 0,0:04:45.86,0:04:51.48,Default,,0000,0000,0000,,the world are rich. But Comparative\NAdvantage explains why it makes sense to
Dialogue: 0,0:04:51.66,0:04:56.33,Default,,0000,0000,0000,,trade and what goods it make sense to trade,\Nand for more on this I invite you to take
Dialogue: 0,0:04:56.51,0:05:00.96,Default,,0000,0000,0000,,a look at my textbook with Tyler, Modern\NPrinciples of Economics. Thanks.
Dialogue: 0,0:05:02.42,0:05:05.30,Default,,0000,0000,0000,,If you want to test yourself click\NPractice Questions,
Dialogue: 0,0:05:05.93,0:05:09.49,Default,,0000,0000,0000,,or if you're ready to\Nmove on just click Next Video.