Comparative Advantage Homework
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0:00 - 0:07♪ [music] ♪
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0:07 - 0:14- [Alex Tabarrok] In this talk
I'm going to give you the answer -
0:14 - 0:17to the homework question,
so before you begin, -
0:19 - 0:20make sure you've done
your homework. -
0:20 - 0:22No cheating.
-
0:22 - 0:26So remember our basic data
is in the top figure right here, -
0:26 - 0:27and we want to now answer
-
0:27 - 0:30supposing that
there's 24 units of labor -- -
0:30 - 0:3512 devoted to computers,
12 to shirts -- -
0:35 - 0:41how many computers
and shirts in Mexico? -
0:41 - 0:43How many in the United States?
-
0:43 - 0:46Okay, well if Mexico devotes
12 units of labor -
0:46 - 0:49to producing computers
and it takes 12 units of labor -
0:49 - 0:50to produce one computer,
-
0:50 - 0:52then you're going to get
one computer. -
0:52 - 0:54In Mexico it takes
two units of labor -
0:54 - 0:57to produce one shirt,
-
0:57 - 1:03so if you devote 12 units of labor
to shirt production -
1:03 - 1:04you're going to get six shirts.
-
1:04 - 1:05United States is even easier
because it just takes -
1:05 - 1:07one unit of labor
to get one computer, -
1:07 - 1:09one unit of labor to get one shirt.
-
1:09 - 1:11Therefore, if you devote
12 units of labor to computers, -
1:12 - 1:13you get 12 computers,
-
1:13 - 1:14and if you devote
12 units of labor to shirts, -
1:14 - 1:16you get 12 shirts.
-
1:16 - 1:18So the total world production
of computers is 13 computers, -
1:18 - 1:21and total world production
of shirts is 18 shirts. -
1:21 - 1:26Okay, now let's suppose that
-
1:26 - 1:29Mexico specializes,
puts all of its labor, -
1:29 - 1:3024 units of labor,
into shirt production -
1:30 - 1:33and zero into computer production.
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1:33 - 1:36How many shirts and computers now?
Well, clearly zero computers. -
1:37 - 1:43Shirts: we now have 12 shirts,
24 units of labor, -
1:44 - 1:492 units of labor per shirts,
so you get 12 shirts in total. -
1:49 - 1:52What about the United States,
which now devotes -
1:52 - 1:5514 units of labor to computers,
10 to shirts. -
1:55 - 1:58Again, because it's one unit
of labor per computer, -
1:58 - 2:01one unit of labor per shirt,
then we simply get 14 and 10. -
2:01 - 2:09Now here's the key, look at the totals. We
now have 14 computers, okay, and 22 -
2:09 - 2:14shirts. So total world production is going
up. We have more computers with -
2:14 - 2:19specialization than we did when the two
countries were not specialized and did not -
2:20 - 2:28trade. Here we have 13 and 18. Now we've
got 14 and 22, a big increase. Now notice -
2:28 - 2:34how, however, that Mexico doesn't have many
computers, okay. And the United States has -
2:34 - 2:41fewer shirts than they did before. So is
there a way to make both countries better -
2:41 - 2:46off? Well, clearly since the total
production has gone up there is. Let's -
2:46 - 2:51take a look at how to do that. Here again
is consumption with no trade. Here is -
2:51 - 2:57production with specialization. Now
suppose that the United States trades one -
2:57 - 3:01computer to get three shirts. There are
other possible trades which make both -
3:01 - 3:06countries better off, but this is a nice
simple one. So the United States trades -
3:06 - 3:12one computer - remember it produced 14 - it
trades one computer to Mexico, so United -
3:12 - 3:17States now has 13, it gives one to Mexico,
and Mexico has one in return for three -
3:17 - 3:24shirts so the United States used to have
10 shirts now it gets 13. Those extra -
3:24 - 3:29three shirts come from Mexico which
produce 12 but now Mexico only consumes 9. -
3:29 - 3:35So now let's take a look. Total production
is the same, okay, but notice what has -
3:35 - 3:42happened to consumption with
specialization and trade compared to when -
3:42 - 3:47there was no trade. So when there was no
trade, Mexico consumes 1 computer and 6 -
3:47 - 3:53shirts, now they're consuming 1 computer
and 9 shirts. So Mexico is better off by -
3:53 - 4:00three shirts. The United States was
consuming 12 computers and 12 shirts, now -
4:00 - 4:03they're consuming 13 of each so they're
better off. -
4:03 - 4:07The United States is better off by one
computer and better off by one shirt. -
4:07 - 4:12Pretty remarkable. Trade according to
Comparative Advantage has made both -
4:12 - 4:18countries better off. One thing to keep in
mind here is that Absolute Advantage, -
4:19 - 4:24although it doesn't explain trade, it does
explain how wealthy countries are. So even -
4:25 - 4:30with trade, notice that Mexico is still
considerably less wealthy than the United -
4:30 - 4:35States, that is, total production of Mexico
is one computer and nine shirts compared to -
4:35 - 4:41the United States with 13 computers and 13
shirts. So Absolute Advantage does explain -
4:41 - 4:46which countries in the world are rich or
one of the aspects of which countries in -
4:46 - 4:51the world are rich. But Comparative
Advantage explains why it makes sense to -
4:52 - 4:56trade and what goods it make sense to trade,
and for more on this I invite you to take -
4:57 - 5:01a look at my textbook with Tyler, Modern
Principles of Economics. Thanks. -
5:02 - 5:05If you want to test yourself click
Practice Questions, -
5:06 - 5:09or 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
- Video Language:
- English
- Team:
- Marginal Revolution University
- Project:
- Micro
- Duration:
- 05:15
danielle rox edited English subtitles for Comparative Advantage Homework | ||
danielle rox edited English subtitles for Comparative Advantage Homework | ||
danielle rox edited English subtitles for Comparative Advantage Homework | ||
danielle rox edited English subtitles for Comparative Advantage Homework | ||
danielle rox edited English subtitles for Comparative Advantage Homework | ||
danielle rox edited English subtitles for Comparative Advantage Homework | ||
danielle rox edited English subtitles for Comparative Advantage Homework | ||
danielle rox edited English subtitles for Comparative Advantage Homework |