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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.
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    We now have 14 computers,
    okay, and 22 shirts.
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    So total world production
    is going 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
    many 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
    with no trade.
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    Here is production
    with specialization.
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    Now suppose that the United States
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    trades one computer
    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,
    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
    specialization and trade
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    compared to when there was no trade.
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    So when there was no trade,
    Mexico consumes one computer and six
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    shirts, 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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    Trade according
    to Comparative Advantage
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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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    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."
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    ♪ [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

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

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