Comparative Advantage Homework
-
0:00 - 0:07♪ [music] ♪
-
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.
-
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 - 2:06Now here's the key,
look at the totals. -
2:06 - 2:09We now have 14 computers,
okay, and 22 shirts. -
2:09 - 2:14So total world production
is going up. -
2:14 - 2:17We have more computers
with specialization -
2:17 - 2:18than we did when the two countries
-
2:18 - 2:20were not specialized
and did not trade. -
2:20 - 2:25Here we have 13 and 18.
-
2:25 - 2:28Now we've got 14 and 22,
a big increase. -
2:28 - 2:31Now notice how, however,
-
2:31 - 2:34that Mexico doesn't have
many computers. -
2:34 - 2:38And the United States has
fewer shirts than they did before. -
2:38 - 2:41So is there a way
to make both countries better off? -
2:41 - 2:43Well, clearly since
-
2:43 - 2:46the total production
has gone up there is. -
2:46 - 2:48Let's take a look at how to do that.
-
2:48 - 2:51Here again is consumption
with no trade. -
2:51 - 2:57Here is production
with specialization. -
2:57 - 2:58Now suppose that the United States
-
2:58 - 2:59trades one computer
to get three shirts. -
2:59 - 3:01There are other possible trades
-
3:01 - 3:04which make both countries
better off, -
3:04 - 3:06but this is a nice simple one.
-
3:06 - 3:09So the United States
trades one computer -- -
3:09 - 3:12remember it produced 14 --
-
3:12 - 3:14it trades one computer to Mexico,
so United States now has 13, -
3:14 - 3:17it gives one to Mexico,
and Mexico has one
in return for three shirts -
3:17 - 3:24so the United States used to have
10 shirts now it gets 13. -
3:24 - 3:26Those extra three shirts
come from Mexico -
3:26 - 3:29which produce 12
but now Mexico only consumes nine. -
3:29 - 3:32So now let's take a look.
-
3:35 - 3:39Total production is the same, okay,
-
3:39 - 3:40but notice what has happened
-
3:40 - 3:42to consumption with
specialization and trade -
3:42 - 3:44compared to when there was no trade.
-
3:44 - 3:47So when there was no trade,
Mexico consumes one computer and six -
3:47 - 3:53shirts, now they're consuming
one computer and nine shirts. -
3:53 - 4:00So Mexico is better off
by three shirts. -
4:00 - 4:01The United States was consuming
12 computers and 12 shirts, -
4:01 - 4:03now they're consuming 13 of each
so they're better off. -
4:03 - 4:04The United States is better off
by one computer -
4:04 - 4:07and better off by one shirt.
-
4:07 - 4:12Pretty remarkable.
-
4:12 - 4:16Trade according
to Comparative Advantage -
4:16 - 4:17has made both countries
better off. -
4:17 - 4:19One thing to keep in mind here
is that Absolute Advantage, -
4:19 - 4:24although it doesn't explain trade,
-
4:25 - 4:27it does explain
how wealthy countries are. -
4:27 - 4:28So even with trade, notice that
Mexico is still considerably -
4:28 - 4:30less wealthy than the United States,
-
4:30 - 4:35that is, total production of Mexico
is one computer and nine shirts -
4:35 - 4:41compared to the United States
with 13 computers and 13 shirts. -
4:41 - 4:46So Absolute Advantage does explain
which countries in the world -
4:46 - 4:49are rich or one of the aspects
-
4:49 - 4:52of which countries
in the world are rich. -
4:52 - 4:54But Comparative Advantage explains
why it makes sense to trade -
4:54 - 4:57and what goods
it make sense to trade, -
4:57 - 4:59and for more on this I invite you
to take a look at my textbook -
4:59 - 5:00with Tyler, Modern Principles
of Economics. -
5:00 - 5:02Thanks.
-
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." -
5:10 - 5:13♪ [music] ♪
- 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 |