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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
    your homework.
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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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    supposing 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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    2 units of labor per shirts,
    so you get 12 shirts in total.
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    What about the United States,
    which now devotes
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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. We
    now have 14 computers, okay, and 22
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    shirts. So total world production is going
    up. We have more computers with
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    specialization than we did when the two
    countries were not specialized and did not
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    trade. Here we have 13 and 18. Now we've
    got 14 and 22, a big increase. Now notice
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    how, however, that Mexico doesn't have many
    computers, okay. And the United States has
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    fewer shirts than they did before. So is
    there a way to make both countries better
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    off? Well, clearly since the total
    production has gone up there is. Let's
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    take a look at how to do that. Here again
    is consumption with no trade. Here is
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    production with specialization. Now
    suppose that the United States trades one
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    computer to get three shirts. There are
    other possible trades which make both
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    countries better off, but this is a nice
    simple one. So the United States trades
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    one computer - remember it produced 14 - it
    trades one computer to Mexico, so United
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    States now has 13, it gives one to Mexico,
    and Mexico has one in return for three
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    shirts so the United States used to have
    10 shirts now it gets 13. Those extra
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    three shirts come from Mexico which
    produce 12 but now Mexico only consumes 9.
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    So now let's take a look. Total production
    is the same, okay, but notice what has
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    happened to consumption with
    specialization and trade compared to when
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    there was no trade. So when there was no
    trade, Mexico consumes 1 computer and 6
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    shirts, now they're consuming 1 computer
    and 9 shirts. So Mexico is better off by
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    three shirts. The United States was
    consuming 12 computers and 12 shirts, now
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    they're consuming 13 of each so they're
    better off.
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    The United States is better off by one
    computer and better off by one shirt.
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    Pretty remarkable. Trade according to
    Comparative Advantage has made both
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    countries better off. One thing to keep in
    mind here is that Absolute Advantage,
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    although it doesn't explain trade, it does
    explain how wealthy countries are. So even
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    with trade, notice that Mexico is still
    considerably less wealthy than the United
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    States, that is, total production of Mexico
    is one computer and nine shirts compared to
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    the United States with 13 computers and 13
    shirts. So Absolute Advantage does explain
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    which countries in the world are rich or
    one of the aspects of which countries in
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    the world are rich. But Comparative
    Advantage explains why it makes sense to
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    trade and what goods it make sense to trade,
    and for more on this I invite you to take
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    a look at my textbook with Tyler, Modern
    Principles of Economics. Thanks.
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    If you want to test yourself click
    Practice Questions,
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    or if you're ready to
    move on just click Next Video.
Title:
Comparative Advantage Homework
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

Ask a question about the video: http://mruniversity.com/courses/principles-economics-microeconomics/comparative-advantage-trade-homework#QandA

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

English subtitles

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