Comparative Advantage Homework
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0:01 - 0:05♪ [music] ♪
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0:09 - 0:12- [Alex Tabarrok] In this talk
I'm going to give you the answer -
0:12 - 0:15to the homework question,
so before you begin, -
0:15 - 0:16make sure you've done
your homework. -
0:16 - 0:18No cheating.
-
0:22 - 0:27So remember our basic data
is in the top figure right here, -
0:27 - 0:29and we want to now answer
-
0:29 - 0:31suppose that there's
24 units of labor -- -
0:31 - 0:3412 devoted to computers,
12 to shirts -- -
0:34 - 0:37how many computers
and shirts in Mexico? -
0:37 - 0:38How many in the United States?
-
0:38 - 0:43Okay, well if Mexico devotes
12 units of labor -
0:43 - 0:46to producing computers
and it takes 12 units of labor -
0:46 - 0:48to produce one computer,
-
0:48 - 0:50then you're going to get
one computer. -
0:50 - 0:53In Mexico it takes
two units of labor -
0:53 - 0:54to produce one shirt,
-
0:54 - 0:58so if you devote 12 units of labor
to shirt production -
0:58 - 1:00you're going to get six shirts.
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1:00 - 1:03United States is even easier
because it just takes -
1:03 - 1:05one unit of labor
to get one computer, -
1:05 - 1:07one unit of labor to get one shirt.
-
1:07 - 1:10Therefore, if you devote
12 units of labor to computers, -
1:10 - 1:11you get 12 computers,
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1:11 - 1:14and if you devote
12 units of labor to shirts, -
1:14 - 1:15you get 12 shirts.
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1:15 - 1:18So the total world production
of computers is 13 computers, -
1:18 - 1:22and total world production
of shirts is 18 shirts. -
1:22 - 1:24Okay, now let's suppose that
-
1:24 - 1:28Mexico specializes,
puts all of its labor, -
1:28 - 1:3124 units of labor,
into shirt production -
1:31 - 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 - 1:42Shirts, we now have 12 shirts,
24 units of labor, -
1:42 - 1:46two units of labor per shirts,
so you get 12 shirts in total. -
1:46 - 1:49What about the United States,
which now devotes -
1:49 - 1:5314 units of labor to computers,
10 to shirts. -
1:53 - 1:56Again, because it's one unit
of labor per computer, -
1:56 - 2:01one unit of labor per shirt,
then we simply get 14 and 10. -
2:01 - 2:03Now here's the key,
look at the totals. -
2:03 - 2:09We now have 14 computers
and 22 shirts. -
2:09 - 2:12So total world production
has gone up. -
2:12 - 2:15We have more computers
with specialization -
2:15 - 2:17than we did when the two countries
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2:17 - 2:20were not specialized
and did not trade. -
2:20 - 2:22Here we have 13 and 18.
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2:22 - 2:27Now we've got 14 and 22,
a big increase. -
2:27 - 2:29Now notice how, however,
-
2:29 - 2:31that Mexico doesn't have
any computers. -
2:32 - 2:37And the United States has
fewer shirts than they did before. -
2:37 - 2:41So is there a way
to make both countries better off? -
2:41 - 2:43Well, clearly since
-
2:43 - 2:45the total production
has gone up there is. -
2:45 - 2:47Let's take a look at how to do that.
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2:47 - 2:50Here again is consumption
with no trade. -
2:50 - 2:53Here is production
with specialization. -
2:53 - 2:55Now suppose that the United States
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2:55 - 2:59trades one computer
to get three shirts. -
2:59 - 3:00There are other possible trades
-
3:00 - 3:02which make both countries
better off, -
3:02 - 3:05but this is a nice simple one.
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3:05 - 3:07So the United States
trades one computer -- -
3:07 - 3:09remember it produced 14 --
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3:09 - 3:13it trades one computer to Mexico,
so United States now has 13, -
3:13 - 3:15it gives one to Mexico,
-
3:15 - 3:18and Mexico has one
in return for three shirts -
3:18 - 3:22so the United States used to have
10 shirts now it gets 13. -
3:22 - 3:25Those extra three shirts
come from Mexico, -
3:25 - 3:29which produce 12
but now Mexico only consumes nine. -
3:29 - 3:31So now let's take a look.
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3:31 - 3:34Total production is the same, okay,
-
3:34 - 3:35but notice what has happened
-
3:35 - 3:41to consumption with
specialization and trade -
3:41 - 3:43compared to when there was no trade.
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3:43 - 3:44So when there was no trade,
-
3:44 - 3:47Mexico consumes
one computer and six shirts, -
3:47 - 3:51now they're consuming
one computer and nine shirts. -
3:51 - 3:54So Mexico is better off
by three shirts. -
3:54 - 3:59The United States was consuming
12 computers and 12 shirts, -
3:59 - 4:03now they're consuming 13 of each
so they're better off. -
4:03 - 4:05The United States is better off
by one computer -
4:05 - 4:07and better off by one shirt.
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4:07 - 4:09Pretty remarkable.
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4:09 - 4:12Trade according
to Comparative Advantage -
4:12 - 4:14has made both countries
better off. -
4:14 - 4:18One thing to keep in mind here
is that Absolute Advantage, -
4:18 - 4:21although it doesn't explain trade,
-
4:21 - 4:24it does explain
how wealthy countries are. -
4:24 - 4:29So even with trade, notice that
Mexico is still considerably -
4:29 - 4:31less wealthy than the United States,
-
4:31 - 4:34that is, total production of Mexico
is one computer and nine shirts -
4:34 - 4:38compared to the United States
with 13 computers and 13 shirts. -
4:38 - 4:42So Absolute Advantage does explain
which countries in the world -
4:42 - 4:45are rich or one of the aspects
-
4:45 - 4:48of which countries
in the world are rich. -
4:48 - 4:52But Comparative Advantage explains
why it makes sense to trade -
4:52 - 4:55and what goods
it make sense to trade, -
4:55 - 4:57and for more on this I invite you
to take a look at my textbook -
4:57 - 5:00with Tyler, "Modern Principles
of Economics." -
5:00 - 5:02Thanks.
-
5:02 - 5:04- [Announcer] If you want
to test yourself -
5:04 - 5:05click "Practice Questions,"
-
5:06 - 5:09or if you're ready to
move on just click "Next Video." -
5:09 - 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 |