## Comparative Advantage Homework

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♪ [music] ♪
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- [Alex Tabarrok] In this talk
I'm going to give you the answer
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to the homework question,
so before you begin,
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make sure you've done
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No cheating.
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So remember our basic data
is in the top figure right here,
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and we want to now answer
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suppose that there's
24 units of labor --
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12 devoted to computers,
12 to shirts --
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how many computers
and shirts in Mexico?
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How many in the United States?
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Okay, well if Mexico devotes
12 units of labor
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to producing computers
and it takes 12 units of labor
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to produce one computer,
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then you're going to get
one computer.
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In Mexico it takes
two units of labor
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to produce one shirt,
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so if you devote 12 units of labor
to shirt production
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you're going to get six shirts.
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United States is even easier
because it just takes
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one unit of labor
to get one computer,
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one unit of labor to get one shirt.
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Therefore, if you devote
12 units of labor to computers,
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you get 12 computers,
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and if you devote
12 units of labor to shirts,
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you get 12 shirts.
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So the total world production
of computers is 13 computers,
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and total world production
of shirts is 18 shirts.
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Okay, now let's suppose that
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Mexico specializes,
puts all of its labor,
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24 units of labor,
into shirt production
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and zero into computer production.
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How many shirts and computers now?
Well, clearly zero computers.
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Shirts, we now have 12 shirts,
24 units of labor,
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two units of labor per shirts,
so you get 12 shirts in total.
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What about the United States,
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14 units of labor to computers,
10 to shirts.
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Again, because it's one unit
of labor per computer,
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one unit of labor per shirt,
then we simply get 14 and 10.
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Now here's the key,
look at the totals.
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We now have 14 computers
and 22 shirts.
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So total world production
has gone up.
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We have more computers
with specialization
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than we did when the two countries
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were not specialized
and did not trade.
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Here we have 13 and 18.
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Now we've got 14 and 22,
a big increase.
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Now notice how, however,
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that Mexico doesn't have
any computers.
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And the United States has
fewer shirts than they did before.
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So is there a way
to make both countries better off?
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Well, clearly since
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the total production
has gone up there is.
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Let's take a look at how to do that.
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Here again is consumption
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Here is production
with specialization.
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Now suppose that the United States
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to get three shirts.
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There are other possible trades
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which make both countries
better off,
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but this is a nice simple one.
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So the United States
trades one computer --
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remember it produced 14 --
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it trades one computer to Mexico,
so United States now has 13,
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it gives one to Mexico,
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and Mexico has one
in return for three shirts
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so the United States used to have
10 shirts now it gets 13.
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Those extra three shirts
come from Mexico,
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which produce 12
but now Mexico only consumes nine.
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So now let's take a look.
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Total production is the same, okay,
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but notice what has happened
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to consumption with
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compared to when there was no trade.
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So when there was no trade,
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Mexico consumes
one computer and six shirts,
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now they're consuming
one computer and nine shirts.
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So Mexico is better off
by three shirts.
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The United States was consuming
12 computers and 12 shirts,
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now they're consuming 13 of each
so they're better off.
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The United States is better off
by one computer
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and better off by one shirt.
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Pretty remarkable.
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has made both countries
better off.
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One thing to keep in mind here
is that Absolute Advantage,
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although it doesn't explain trade,
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it does explain
how wealthy countries are.
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So even with trade, notice that
Mexico is still considerably
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less wealthy than the United States,
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that is, total production of Mexico
is one computer and nine shirts
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compared to the United States
with 13 computers and 13 shirts.
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So Absolute Advantage does explain
which countries in the world
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are rich or one of the aspects
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of which countries
in the world are rich.
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But Comparative Advantage explains
why it makes sense to trade
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and what goods
it make sense to trade,
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and for more on this I invite you
to take a look at my textbook
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with Tyler, "Modern Principles
of Economics."
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Thanks.
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- [Announcer] If you want
to test yourself
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click "Practice Questions,"
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or if you're ready to
move on just click "Next Video."
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♪ [music] ♪
Title:
Description:

Make sure you’ve completed the homework introduced in the Comparative Advantage video before you watch this video, as we’ll be going over the answer. We take a look at our example which compares shirt and computer production and consumption in Mexico and the United States. At the end of this video, you’ll have a better understanding of why it makes sense for countries to engage in trade. - See more at: http://mruniversity.com/courses/principles-economics-microeconomics/comparative-advantage-trade-homework?

Microeconomics Course: http://mruniversity.com/courses/principles-economics-microeconomics

Next video: http://mruniversity.com/courses/principles-economics-microeconomics/tariffs-quotas-protectionism-definition

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Video Language:
English
Team:
Marginal Revolution University
Project:
Micro
Duration:
05:15
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