Comparative Advantage Homework

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?

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- In this talk I'm going to give you the
answer to the homework question, so before

you begin, make sure you've done your
homework. No cheating.

So remember our basic
data is in the top figure

right here, and we want to
now answer supposing that there's

24 units of labor - 12 devoted to
computers, 12 to shirts - how many

computers and shirts in Mexico? How many
in the United States? Okay, well if Mexico

devotes 12 units of labor to producing
computers and it takes 12 units of labor

to produce one computer, then you're going
to get one computer. In Mexico it takes

two units of labor to produce one shirt,
so if you devote 12 units of labor to

shirt production you're going to get six
shirts. United States is even easier because

it just takes one unit of labor to get one
computer, one unit of labor to get one

shirt. Therefore, if you devote 12 units of
labor to computers, you get 12 computers,

and if you devote 12 units of labor to shirts,
you get 12 shirts. So the total world

production of computers is 13 computers,
and total world production of shirts is 18

shirts. Okay, now let's suppose that
Mexico specializes, puts all of its labor,

24 units of labor, into shirt production
and zero into computer production.

How many shirts and computers now?
Well, clearly zero computers.

Shirts: we now have 12 shirts,
24 units of labor, 2 units of labor per

shirts, so you get 12 shirts in total. What
about the United States, which now devotes

14 units of labor to computers, 10 to
shirts. Again, because it's one unit of

labor per computer, one unit of labor per
shirt, then we simply get 14 and 10.

Now here's the key, look at the totals. We
now have 14 computers, okay, and 22

shirts. So total world production is going
up. We have more computers with

specialization than we did when the two
countries were not specialized and did not

trade. Here we have 13 and 18. Now we've
got 14 and 22, a big increase. Now notice

how, however, that Mexico doesn't have many
computers, okay. And the United States has

fewer shirts than they did before. So is
there a way to make both countries better

off? Well, clearly since the total
production has gone up there is. Let's

take a look at how to do that. Here again
is consumption with no trade. Here is

production with specialization. Now
suppose that the United States trades one

computer to get three shirts. There are
other possible trades which make both

countries better off, but this is a nice
simple one. So the United States trades

one computer - remember it produced 14 - it
trades one computer to Mexico, so United

States now has 13, it gives one to Mexico,
and Mexico has one in return for three

shirts so the United States used to have
10 shirts now it gets 13. Those extra

three shirts come from Mexico which
produce 12 but now Mexico only consumes 9.

So now let's take a look. Total production
is the same, okay, but notice what has

happened to consumption with
specialization and trade compared to when

there was no trade. So when there was no
trade, Mexico consumes 1 computer and 6

shirts, now they're consuming 1 computer
and 9 shirts. So Mexico is better off by

three shirts. The United States was
consuming 12 computers and 12 shirts, now

they're consuming 13 of each so they're
better off.

The United States is better off by one
computer and better off by one shirt.

Pretty remarkable. Trade according to
Comparative Advantage has made both

countries better off. One thing to keep in
mind here is that Absolute Advantage,

although it doesn't explain trade, it does
explain how wealthy countries are. So even

with trade, notice that Mexico is still
considerably less wealthy than the United

States, that is, total production of Mexico
is one computer and nine shirts compared to

the United States with 13 computers and 13
shirts. So Absolute Advantage does explain

which countries in the world are rich or
one of the aspects of which countries in

the world are rich. But Comparative
Advantage explains why it makes sense to

trade and what goods it make sense to trade,
and for more on this I invite you to take

a look at my textbook with Tyler, Modern
Principles of Economics. Thanks.

If you want to test yourself click
Practice Questions,

or if you're ready to
move on just click Next Video.