[Script Info]
Title: 
[Events]
Format: Layer, Start, End, Style, Name, MarginL, MarginR, MarginV, Effect, Text
Dialogue: 0,0:00:09.71,0:00:10.79,Default,,0000,0000,0000,,- [Alex] In our last video,
Dialogue: 0,0:00:10.79,0:00:14.22,Default,,0000,0000,0000,,Don Boudreaux used\Nthe simple example of Bob and Anne
Dialogue: 0,0:00:14.22,0:00:16.08,Default,,0000,0000,0000,,to demonstrate\Ncomparative advantage.
Dialogue: 0,0:00:16.56,0:00:17.61,Default,,0000,0000,0000,,In the next two videos,
Dialogue: 0,0:00:17.61,0:00:20.12,Default,,0000,0000,0000,,we'll dive deeper\Ninto comparative advantage
Dialogue: 0,0:00:20.12,0:00:21.29,Default,,0000,0000,0000,,and give you a homework question
Dialogue: 0,0:00:21.29,0:00:24.58,Default,,0000,0000,0000,,to test how well you're doing\Nin understanding the concept.
Dialogue: 0,0:00:24.58,0:00:25.58,Default,,0000,0000,0000,,Let's get going.
Dialogue: 0,0:00:30.09,0:00:32.73,Default,,0000,0000,0000,,Comparative advantage\Nis a theory of trade.
Dialogue: 0,0:00:32.73,0:00:37.15,Default,,0000,0000,0000,,It explains why people trade,\Nand which goods people should trade
Dialogue: 0,0:00:37.15,0:00:39.43,Default,,0000,0000,0000,,if they want to maximize\Ntheir well-being.
Dialogue: 0,0:00:40.06,0:00:43.49,Default,,0000,0000,0000,,It's actually useful to understand\Ncomparative advantage
Dialogue: 0,0:00:43.49,0:00:45.34,Default,,0000,0000,0000,,to begin with a false theory,
Dialogue: 0,0:00:45.34,0:00:48.78,Default,,0000,0000,0000,,a very plausible\Nbut incorrect theory of trade --
Dialogue: 0,0:00:48.78,0:00:51.08,Default,,0000,0000,0000,,namely the theory\Nof absolute advantage.
Dialogue: 0,0:00:51.46,0:00:53.27,Default,,0000,0000,0000,,So let's consider a simple model.
Dialogue: 0,0:00:53.27,0:00:56.94,Default,,0000,0000,0000,,Let's suppose that labor\Nis the only good used in production
Dialogue: 0,0:00:56.94,0:01:00.15,Default,,0000,0000,0000,,and that we can produce\Ncomputers or shirts.
Dialogue: 0,0:01:00.15,0:01:04.27,Default,,0000,0000,0000,,Now let's suppose that in Mexico\Nit takes 12 units of labor
Dialogue: 0,0:01:04.27,0:01:06.52,Default,,0000,0000,0000,,to produce one computer.
Dialogue: 0,0:01:06.52,0:01:07.86,Default,,0000,0000,0000,,Again, in Mexico,
Dialogue: 0,0:01:07.86,0:01:11.72,Default,,0000,0000,0000,,it takes two units of labor\Nto produce one shirt.
Dialogue: 0,0:01:11.72,0:01:14.01,Default,,0000,0000,0000,,Now let's compare\Nwith the United States.
Dialogue: 0,0:01:14.01,0:01:16.70,Default,,0000,0000,0000,,To make it simple, we'll suppose\Nthat in the United States
Dialogue: 0,0:01:16.70,0:01:19.98,Default,,0000,0000,0000,,it takes just one unit of labor\Nto make one computer,
Dialogue: 0,0:01:19.98,0:01:23.51,Default,,0000,0000,0000,,and one unit of labor\Nto create one shirt.
Dialogue: 0,0:01:23.92,0:01:28.66,Default,,0000,0000,0000,,Now, from the absolute advantage\Ntheory of trade
Dialogue: 0,0:01:28.66,0:01:31.36,Default,,0000,0000,0000,,it may seem obvious\Nthat there in fact
Dialogue: 0,0:01:31.36,0:01:32.87,Default,,0000,0000,0000,,will be no trade here.
Dialogue: 0,0:01:32.87,0:01:35.60,Default,,0000,0000,0000,,It may seem obvious\Nthat the United States
Dialogue: 0,0:01:35.60,0:01:39.78,Default,,0000,0000,0000,,will outcompete Mexico\Non all margins.
Dialogue: 0,0:01:39.78,0:01:42.26,Default,,0000,0000,0000,,After all, the United States\Nin this example
Dialogue: 0,0:01:42.26,0:01:45.39,Default,,0000,0000,0000,,is much more productive\Nat producing computers
Dialogue: 0,0:01:45.39,0:01:49.16,Default,,0000,0000,0000,,and also more productive\Nat producing shirts than Mexico.
Dialogue: 0,0:01:49.58,0:01:50.98,Default,,0000,0000,0000,,So this is a case\Nwhere we might think,
Dialogue: 0,0:01:50.98,0:01:53.71,Default,,0000,0000,0000,,well the United States\Nis so much better
Dialogue: 0,0:01:53.71,0:01:56.34,Default,,0000,0000,0000,,at producing\Nboth computers and shirts,
Dialogue: 0,0:01:56.34,0:01:58.48,Default,,0000,0000,0000,,that certainly there's no reason
Dialogue: 0,0:01:58.48,0:02:01.90,Default,,0000,0000,0000,,for the United States\Nto trade with Mexico,
Dialogue: 0,0:02:01.90,0:02:05.01,Default,,0000,0000,0000,,its less productive neighbor.
Dialogue: 0,0:02:06.47,0:02:08.73,Default,,0000,0000,0000,,That's the theory\Nof absolute advantage.
Dialogue: 0,0:02:08.95,0:02:11.91,Default,,0000,0000,0000,,It's very plausible.\NIt's also very wrong.
Dialogue: 0,0:02:11.91,0:02:14.69,Default,,0000,0000,0000,,To see why it's wrong,\Nlet's take another simple example.
Dialogue: 0,0:02:14.97,0:02:17.76,Default,,0000,0000,0000,,Here's a picture of Martha Stewart\Nironing her shirt.
Dialogue: 0,0:02:18.02,0:02:20.89,Default,,0000,0000,0000,,Now, let's stipulate\Nthat Martha Stewart
Dialogue: 0,0:02:20.89,0:02:23.71,Default,,0000,0000,0000,,has an absolute advantage\Nin ironing.
Dialogue: 0,0:02:23.98,0:02:27.08,Default,,0000,0000,0000,,She has an advantage in ironing\Njust like the United States
Dialogue: 0,0:02:27.08,0:02:29.75,Default,,0000,0000,0000,,had an advantage in producing\Ncomputers and shirts
Dialogue: 0,0:02:29.75,0:02:31.28,Default,,0000,0000,0000,,in the previous example.
Dialogue: 0,0:02:31.28,0:02:34.03,Default,,0000,0000,0000,,In other words, we'll stipulate\Nthat Martha Stewart
Dialogue: 0,0:02:34.03,0:02:38.76,Default,,0000,0000,0000,,can iron a shirt better\Nand in less time than anyone else.
Dialogue: 0,0:02:39.26,0:02:43.19,Default,,0000,0000,0000,,So, if Martha Stewart has\Nan absolute advantage in ironing
Dialogue: 0,0:02:43.64,0:02:46.29,Default,,0000,0000,0000,,should Martha Stewart\Niron her own shirts?
Dialogue: 0,0:02:46.87,0:02:49.77,Default,,0000,0000,0000,,Of course the answer here is, no.
Dialogue: 0,0:02:50.08,0:02:51.18,Default,,0000,0000,0000,,Why not?
Dialogue: 0,0:02:51.45,0:02:54.38,Default,,0000,0000,0000,,Well, every hour\Nwhich Martha Stewart spends
Dialogue: 0,0:02:54.38,0:02:58.02,Default,,0000,0000,0000,,ironing her shirts is an hour\Nshe's not spending
Dialogue: 0,0:02:58.02,0:03:01.04,Default,,0000,0000,0000,,doing something else\Nwhich is even more valuable,
Dialogue: 0,0:03:01.04,0:03:03.27,Default,,0000,0000,0000,,running her own business\Nfor example --
Dialogue: 0,0:03:03.27,0:03:05.50,Default,,0000,0000,0000,,running her billion-dollar business.
Dialogue: 0,0:03:05.50,0:03:08.24,Default,,0000,0000,0000,,And in fact in a famous statement,\NMartha Stewart --
Dialogue: 0,0:03:08.24,0:03:09.100,Default,,0000,0000,0000,,because she's very wise --
Dialogue: 0,0:03:09.100,0:03:13.45,Default,,0000,0000,0000,,she said, "I don't always\Ndo all of my own ironing,
Dialogue: 0,0:03:13.45,0:03:15.39,Default,,0000,0000,0000,,even though I wish that I could."
Dialogue: 0,0:03:15.87,0:03:19.26,Default,,0000,0000,0000,,Let's take a little bit more detail\Nabout why it doesn't make sense
Dialogue: 0,0:03:19.26,0:03:22.05,Default,,0000,0000,0000,,for Martha Stewart\Nto iron her own shirts.
Dialogue: 0,0:03:22.83,0:03:24.98,Default,,0000,0000,0000,,The most important point\Nto remember
Dialogue: 0,0:03:24.98,0:03:29.02,Default,,0000,0000,0000,,is that the important cost\Nis opportunity cost.
Dialogue: 0,0:03:29.49,0:03:32.50,Default,,0000,0000,0000,,So what is the opportunity cost\Nto Martha Stewart
Dialogue: 0,0:03:32.50,0:03:34.83,Default,,0000,0000,0000,,of spending an hour\Nironing her own shirts?
Dialogue: 0,0:03:35.29,0:03:38.23,Default,,0000,0000,0000,,Well, it could be\Nthousands of dollars, at least.
Dialogue: 0,0:03:38.56,0:03:41.35,Default,,0000,0000,0000,,Martha Stewart will be better off
Dialogue: 0,0:03:41.35,0:03:45.26,Default,,0000,0000,0000,,if she specializes in producing\Nher television show,
Dialogue: 0,0:03:45.26,0:03:47.13,Default,,0000,0000,0000,,and then she trades\Nwith someone else
Dialogue: 0,0:03:47.13,0:03:50.31,Default,,0000,0000,0000,,who has a lower\Nopportunity cost of ironing.
Dialogue: 0,0:03:50.31,0:03:52.58,Default,,0000,0000,0000,,It doesn't make sense\Nfor Martha Stewart
Dialogue: 0,0:03:52.58,0:03:54.40,Default,,0000,0000,0000,,to iron her own shirts
Dialogue: 0,0:03:54.40,0:03:56.93,Default,,0000,0000,0000,,because the cost of her doing so
Dialogue: 0,0:03:56.93,0:04:01.23,Default,,0000,0000,0000,,is devoting her time to something\Nwhere she's even more valuable
Dialogue: 0,0:04:01.23,0:04:03.16,Default,,0000,0000,0000,,where she's even better,
Dialogue: 0,0:04:03.16,0:04:05.49,Default,,0000,0000,0000,,and that is producing\Nher own television show.
Dialogue: 0,0:04:06.13,0:04:09.26,Default,,0000,0000,0000,,So Martha Stewart\Nhas a comparative advantage
Dialogue: 0,0:04:09.26,0:04:12.69,Default,,0000,0000,0000,,in running her business,\Nor to put it slightly differently
Dialogue: 0,0:04:12.69,0:04:15.83,Default,,0000,0000,0000,,she has a comparative\Ndisadvantage in ironing.
Dialogue: 0,0:04:15.83,0:04:19.53,Default,,0000,0000,0000,,The cost to her of ironing\Nis very high
Dialogue: 0,0:04:19.53,0:04:24.32,Default,,0000,0000,0000,,precisely because she is so much\Nmore productive at other tasks.
Dialogue: 0,0:04:24.66,0:04:27.85,Default,,0000,0000,0000,,So Martha Stewart\Nwants to specialize
Dialogue: 0,0:04:27.85,0:04:30.85,Default,,0000,0000,0000,,in what she is most best at,
Dialogue: 0,0:04:30.85,0:04:33.65,Default,,0000,0000,0000,,in where she has\Na comparative advantage.
Dialogue: 0,0:04:34.11,0:04:37.77,Default,,0000,0000,0000,,Other people are almost as good\Nas her at ironing clothes,
Dialogue: 0,0:04:37.77,0:04:42.26,Default,,0000,0000,0000,,but they're not as good as her\Nat producing her own TV show.
Dialogue: 0,0:04:42.63,0:04:46.10,Default,,0000,0000,0000,,So that's why Martha Stewart\Nshouldn't iron her own shirts.
Dialogue: 0,0:04:46.45,0:04:48.52,Default,,0000,0000,0000,,Let's go back now\Nto our previous example
Dialogue: 0,0:04:48.52,0:04:51.22,Default,,0000,0000,0000,,of the United States and Mexico.
Dialogue: 0,0:04:51.58,0:04:55.07,Default,,0000,0000,0000,,So the key to comparative advantage\Nis understanding opportunity cost.
Dialogue: 0,0:04:55.58,0:04:59.71,Default,,0000,0000,0000,,So let's take this previous figure\Nwe had from a previous slide
Dialogue: 0,0:04:59.71,0:05:02.67,Default,,0000,0000,0000,,and turn it\Ninto an opportunity cost figure.
Dialogue: 0,0:05:02.98,0:05:05.66,Default,,0000,0000,0000,,So remember\Nwhat this top figure tells us --
Dialogue: 0,0:05:05.66,0:05:08.18,Default,,0000,0000,0000,,it tells us for example\Nthat in Mexico
Dialogue: 0,0:05:08.18,0:05:11.16,Default,,0000,0000,0000,,it takes 12 units of labor\Nto produce one computer,
Dialogue: 0,0:05:11.16,0:05:13.15,Default,,0000,0000,0000,,and in Mexico it takes\Ntwo units of labor
Dialogue: 0,0:05:13.15,0:05:15.54,Default,,0000,0000,0000,,to produce one shirt\Nand so forth.
Dialogue: 0,0:05:16.01,0:05:18.68,Default,,0000,0000,0000,,Okay, for the United States,\Nit just takes one unit of labor
Dialogue: 0,0:05:18.68,0:05:21.08,Default,,0000,0000,0000,,to produce\Neither a computer or a shirt.
Dialogue: 0,0:05:21.40,0:05:24.87,Default,,0000,0000,0000,,Okay, now let's begin\Nwith an easy case.
Dialogue: 0,0:05:25.45,0:05:30.06,Default,,0000,0000,0000,,What's the opportunity cost of\None computer in the United States?
Dialogue: 0,0:05:30.79,0:05:34.08,Default,,0000,0000,0000,,In other words, to produce\Nan additional computer
Dialogue: 0,0:05:34.08,0:05:36.85,Default,,0000,0000,0000,,in the United States,\Nwhat would we have to give up?
Dialogue: 0,0:05:37.89,0:05:39.80,Default,,0000,0000,0000,,Well, in order to get\Nthat additional computer,
Dialogue: 0,0:05:39.80,0:05:42.12,Default,,0000,0000,0000,,we'd have to take labor\Nfrom shirt production
Dialogue: 0,0:05:42.12,0:05:44.70,Default,,0000,0000,0000,,and move it\Ninto computer production.
Dialogue: 0,0:05:45.00,0:05:47.71,Default,,0000,0000,0000,,In particular, we have to take\None unit of labor
Dialogue: 0,0:05:47.71,0:05:51.09,Default,,0000,0000,0000,,from shirt production and move it\Ninto computer production.
Dialogue: 0,0:05:51.61,0:05:56.02,Default,,0000,0000,0000,,That would get us one more computer\Nat the cost of one shirt.
Dialogue: 0,0:05:56.30,0:05:57.71,Default,,0000,0000,0000,,So the opportunity cost
Dialogue: 0,0:05:57.71,0:06:01.49,Default,,0000,0000,0000,,of one computer\Nin the United States is one shirt.
Dialogue: 0,0:06:02.01,0:06:04.20,Default,,0000,0000,0000,,What is the opportunity cost\Nof a shirt?
Dialogue: 0,0:06:04.47,0:06:06.58,Default,,0000,0000,0000,,Well, the opportunity cost\Nof a shirt,
Dialogue: 0,0:06:06.58,0:06:08.77,Default,,0000,0000,0000,,what you're giving up\Nto produce an extra shirt,
Dialogue: 0,0:06:08.77,0:06:10.57,Default,,0000,0000,0000,,is one computer.
Dialogue: 0,0:06:10.83,0:06:13.78,Default,,0000,0000,0000,,Okay, slightly harder case --
Dialogue: 0,0:06:14.06,0:06:18.91,Default,,0000,0000,0000,,what's the opportunity cost\Nof one computer in Mexico?
Dialogue: 0,0:06:19.47,0:06:22.94,Default,,0000,0000,0000,,So in Mexico, in order to get\Nan additional computer,
Dialogue: 0,0:06:22.94,0:06:24.60,Default,,0000,0000,0000,,you'd have to transfer labor
Dialogue: 0,0:06:24.60,0:06:27.42,Default,,0000,0000,0000,,from shirt production\Ninto computer production.
Dialogue: 0,0:06:28.14,0:06:30.27,Default,,0000,0000,0000,,But how many units of labor\Ndo you need to transfer?
Dialogue: 0,0:06:30.27,0:06:32.82,Default,,0000,0000,0000,,You need to transfer\N12 units of labor.
Dialogue: 0,0:06:33.18,0:06:35.30,Default,,0000,0000,0000,,In order to get one computer
Dialogue: 0,0:06:35.30,0:06:37.45,Default,,0000,0000,0000,,you're going to have\Nto take 12 units of labor
Dialogue: 0,0:06:37.45,0:06:38.96,Default,,0000,0000,0000,,from shirt production.
Dialogue: 0,0:06:38.96,0:06:41.12,Default,,0000,0000,0000,,That means how many fewer shirts?
Dialogue: 0,0:06:41.63,0:06:44.29,Default,,0000,0000,0000,,Since it takes two units of labor\Nto produce one shirt,
Dialogue: 0,0:06:44.29,0:06:47.08,Default,,0000,0000,0000,,and you've got to move\N12 units of labor,
Dialogue: 0,0:06:47.08,0:06:51.82,Default,,0000,0000,0000,,it means that the opportunity cost\Nof one computer is six shirts.
Dialogue: 0,0:06:52.44,0:06:54.32,Default,,0000,0000,0000,,If you need an additional computer,
Dialogue: 0,0:06:54.32,0:06:57.33,Default,,0000,0000,0000,,it's going to cost you\Nsix fewer shirts
Dialogue: 0,0:06:57.33,0:06:59.29,Default,,0000,0000,0000,,in order to get that computer.
Dialogue: 0,0:06:59.100,0:07:03.19,Default,,0000,0000,0000,,Going the other way, in order\Nto get an additional shirt,
Dialogue: 0,0:07:03.19,0:07:06.57,Default,,0000,0000,0000,,you're going to have to give up\None-sixth of a computer.
Dialogue: 0,0:07:06.91,0:07:09.77,Default,,0000,0000,0000,,Okay, so now we have\Nour opportunity costs,
Dialogue: 0,0:07:10.04,0:07:11.49,Default,,0000,0000,0000,,and now it's actually pretty simple
Dialogue: 0,0:07:11.49,0:07:14.89,Default,,0000,0000,0000,,because what the theory\Nof comparative advantage says
Dialogue: 0,0:07:14.89,0:07:19.17,Default,,0000,0000,0000,,is that you should produce,\Nor you can produce at lowest cost.
Dialogue: 0,0:07:19.85,0:07:24.66,Default,,0000,0000,0000,,So who here has the lowest cost\Nof producing a computer?
Dialogue: 0,0:07:25.67,0:07:27.99,Default,,0000,0000,0000,,The lowest cost\Nof producing a computer
Dialogue: 0,0:07:27.99,0:07:29.44,Default,,0000,0000,0000,,is the United States.
Dialogue: 0,0:07:29.44,0:07:32.60,Default,,0000,0000,0000,,The United States is\Nthe low opportunity cost producer
Dialogue: 0,0:07:32.60,0:07:34.01,Default,,0000,0000,0000,,of computers.
Dialogue: 0,0:07:34.50,0:07:38.48,Default,,0000,0000,0000,,Now, who is the low cost\Nproducer of shirts?
Dialogue: 0,0:07:39.22,0:07:42.56,Default,,0000,0000,0000,,Well, it's Mexico.
Dialogue: 0,0:07:42.82,0:07:46.47,Default,,0000,0000,0000,,In Mexico, you're only giving up\None-sixth of a computer
Dialogue: 0,0:07:46.47,0:07:47.82,Default,,0000,0000,0000,,to produce a shirt.
Dialogue: 0,0:07:47.82,0:07:49.86,Default,,0000,0000,0000,,In the United States,\Nyou're giving up one computer
Dialogue: 0,0:07:49.86,0:07:51.16,Default,,0000,0000,0000,,to produce a shirt.
Dialogue: 0,0:07:51.16,0:07:54.30,Default,,0000,0000,0000,,So you'd much rather\Nproduce shirts in Mexico
Dialogue: 0,0:07:54.30,0:07:57.56,Default,,0000,0000,0000,,where the opportunity cost is lower.
Dialogue: 0,0:07:57.86,0:08:00.76,Default,,0000,0000,0000,,Okay, so what we're learning here
Dialogue: 0,0:08:00.76,0:08:05.12,Default,,0000,0000,0000,,is that Mexico ought\Nto specialize in computers
Dialogue: 0,0:08:05.12,0:08:08.24,Default,,0000,0000,0000,,because they're\Nthe low cost producer of --
Dialogue: 0,0:08:08.24,0:08:09.65,Default,,0000,0000,0000,,excuse me, in shirts
Dialogue: 0,0:08:09.65,0:08:11.84,Default,,0000,0000,0000,,because they're\Nthe low cost producer of shirts.
Dialogue: 0,0:08:12.12,0:08:16.49,Default,,0000,0000,0000,,The United States ought\Nto specialize more towards computers
Dialogue: 0,0:08:16.49,0:08:19.32,Default,,0000,0000,0000,,because they're\Nthe low cost producer of computers.
Dialogue: 0,0:08:19.61,0:08:20.100,Default,,0000,0000,0000,,Let's look in more detail.
Dialogue: 0,0:08:21.79,0:08:24.03,Default,,0000,0000,0000,,So I'm going to leave some\Nof the details to you actually
Dialogue: 0,0:08:24.03,0:08:25.60,Default,,0000,0000,0000,,and some homework questions
Dialogue: 0,0:08:25.60,0:08:28.19,Default,,0000,0000,0000,,which we'll go over\Nin a future video.
Dialogue: 0,0:08:28.46,0:08:31.82,Default,,0000,0000,0000,,So question one -- let's suppose\Nthat Mexico and the United States
Dialogue: 0,0:08:31.82,0:08:34.13,Default,,0000,0000,0000,,each have 24 units of labor,
Dialogue: 0,0:08:34.13,0:08:36.48,Default,,0000,0000,0000,,and that they each devote\N12 units of labor
Dialogue: 0,0:08:36.48,0:08:37.79,Default,,0000,0000,0000,,to producing computers
Dialogue: 0,0:08:37.79,0:08:40.31,Default,,0000,0000,0000,,and 12 units of labor\Nto producing shirts.
Dialogue: 0,0:08:40.58,0:08:44.04,Default,,0000,0000,0000,,That will be our baseline scenario.\NSo the question is --
Dialogue: 0,0:08:44.04,0:08:47.23,Default,,0000,0000,0000,,What is total world production\Nin this scenario?
Dialogue: 0,0:08:47.23,0:08:48.63,Default,,0000,0000,0000,,That's question one.
Dialogue: 0,0:08:48.63,0:08:49.86,Default,,0000,0000,0000,,Question two.
Dialogue: 0,0:08:49.86,0:08:53.77,Default,,0000,0000,0000,,Suppose that Mexico\Nspecializes in producing
Dialogue: 0,0:08:53.77,0:08:56.38,Default,,0000,0000,0000,,what it produces\Nat lowest opportunity cost --
Dialogue: 0,0:08:56.38,0:08:58.41,Default,,0000,0000,0000,,we just saw that was shirts --
Dialogue: 0,0:08:58.41,0:09:01.66,Default,,0000,0000,0000,,and suppose that the U.S.\Ntransfers two units of labor
Dialogue: 0,0:09:01.66,0:09:04.70,Default,,0000,0000,0000,,from shirts to producing\Nwhat it produces
Dialogue: 0,0:09:04.70,0:09:07.50,Default,,0000,0000,0000,,at lowest opportunity cost --\Nthat's computers.
Dialogue: 0,0:09:07.85,0:09:11.33,Default,,0000,0000,0000,,What then\Nis total world production?
Dialogue: 0,0:09:12.03,0:09:15.56,Default,,0000,0000,0000,,Finally, can trade make\Nboth countries better off?
Dialogue: 0,0:09:15.56,0:09:19.18,Default,,0000,0000,0000,,And here what I'd like you to do\Nis give a concrete example
Dialogue: 0,0:09:19.18,0:09:23.29,Default,,0000,0000,0000,,of how many units have to be traded\Nfrom where to where
Dialogue: 0,0:09:23.29,0:09:25.08,Default,,0000,0000,0000,,in order to make\Nboth countries better off,
Dialogue: 0,0:09:25.08,0:09:26.96,Default,,0000,0000,0000,,if that in fact is possible.
Dialogue: 0,0:09:27.48,0:09:29.18,Default,,0000,0000,0000,,So to help you along a little bit --
Dialogue: 0,0:09:29.18,0:09:30.93,Default,,0000,0000,0000,,I know that was a mouthful --
Dialogue: 0,0:09:30.93,0:09:33.68,Default,,0000,0000,0000,,let's take a look at this\Nin terms of a diagram.
Dialogue: 0,0:09:34.68,0:09:37.46,Default,,0000,0000,0000,,To help you along,\NI want you to fill in these tables.
Dialogue: 0,0:09:37.68,0:09:38.68,Default,,0000,0000,0000,,So our basic table
Dialogue: 0,0:09:38.68,0:09:41.98,Default,,0000,0000,0000,,from which you're going\Nto draw the information is up here.
Dialogue: 0,0:09:41.98,0:09:44.80,Default,,0000,0000,0000,,If both countries have\N24 units of labor,
Dialogue: 0,0:09:44.80,0:09:47.93,Default,,0000,0000,0000,,half devoted to computers,\Nhalf to shirts, there's no trade,
Dialogue: 0,0:09:47.93,0:09:49.94,Default,,0000,0000,0000,,so production is equal\Nto consumption
Dialogue: 0,0:09:49.94,0:09:53.58,Default,,0000,0000,0000,,in this first example --\Nwhat is production going to be?
Dialogue: 0,0:09:54.11,0:09:57.35,Default,,0000,0000,0000,,So Mexico, 12 units of labor\Nwith computers, 12 shirts.
Dialogue: 0,0:09:57.35,0:09:59.17,Default,,0000,0000,0000,,How many computers,\Nhow many shirts?
Dialogue: 0,0:09:59.17,0:10:00.44,Default,,0000,0000,0000,,Same for the United States.
Dialogue: 0,0:10:00.44,0:10:02.00,Default,,0000,0000,0000,,How many computers?\NHow many shirts?
Dialogue: 0,0:10:02.00,0:10:04.55,Default,,0000,0000,0000,,What's total world production?
Dialogue: 0,0:10:04.55,0:10:06.56,Default,,0000,0000,0000,,Then suppose\Nwe have specialization --
Dialogue: 0,0:10:06.56,0:10:08.07,Default,,0000,0000,0000,,what's production is going to be?
Dialogue: 0,0:10:08.07,0:10:12.67,Default,,0000,0000,0000,,So Mexico has zero units of labor\Nin computers, 24 in shirts.
Dialogue: 0,0:10:12.67,0:10:17.19,Default,,0000,0000,0000,,United States has 14 units of labor\Nin computers, 10 in shirts.
Dialogue: 0,0:10:17.19,0:10:18.70,Default,,0000,0000,0000,,What's production in each case?
Dialogue: 0,0:10:18.70,0:10:20.80,Default,,0000,0000,0000,,What is the total for the world?
Dialogue: 0,0:10:20.80,0:10:23.56,Default,,0000,0000,0000,,Then finally, can we --
Dialogue: 0,0:10:23.56,0:10:25.65,Default,,0000,0000,0000,,with production,\Nwith specialization,
Dialogue: 0,0:10:25.65,0:10:28.13,Default,,0000,0000,0000,,can we now find a way to have trade
Dialogue: 0,0:10:28.13,0:10:30.65,Default,,0000,0000,0000,,which makes both countries\Nbetter off?
Dialogue: 0,0:10:30.65,0:10:34.07,Default,,0000,0000,0000,,And what's the exact,\Nor what's a exact price ratio
Dialogue: 0,0:10:34.07,0:10:35.67,Default,,0000,0000,0000,,at which that trade will occur?
Dialogue: 0,0:10:35.96,0:10:38.22,Default,,0000,0000,0000,,We'll take that up\Nin a later video.
Dialogue: 0,0:10:38.22,0:10:40.95,Default,,0000,0000,0000,,Let me just finally give you\Nsome concluding comments
Dialogue: 0,0:10:40.95,0:10:42.54,Default,,0000,0000,0000,,on comparative advantage.
Dialogue: 0,0:10:43.25,0:10:44.87,Default,,0000,0000,0000,,I want to conclude with a caution
Dialogue: 0,0:10:44.87,0:10:47.59,Default,,0000,0000,0000,,but also a big picture view\Nof comparative advantage.
Dialogue: 0,0:10:48.16,0:10:50.65,Default,,0000,0000,0000,,In the two country/person examples\NI've been working with
Dialogue: 0,0:10:50.65,0:10:52.59,Default,,0000,0000,0000,,in order to explain the theory,
Dialogue: 0,0:10:52.59,0:10:54.48,Default,,0000,0000,0000,,everyone is made\Nbetter off by trade.
Dialogue: 0,0:10:55.07,0:10:58.80,Default,,0000,0000,0000,,In larger examples, trade\Nwill increase aggregate wealth,
Dialogue: 0,0:10:58.80,0:11:01.19,Default,,0000,0000,0000,,but some individuals\Ncan be made worse off.
Dialogue: 0,0:11:01.45,0:11:02.80,Default,,0000,0000,0000,,And that should make perfect sense.
Dialogue: 0,0:11:02.80,0:11:06.34,Default,,0000,0000,0000,,After all, if A and B\Nhave been trading,
Dialogue: 0,0:11:06.34,0:11:08.19,Default,,0000,0000,0000,,and then because tariffs fall
Dialogue: 0,0:11:08.19,0:11:10.23,Default,,0000,0000,0000,,or because\Ntransportation costs fall,
Dialogue: 0,0:11:10.23,0:11:14.29,Default,,0000,0000,0000,,if A starts trading with C,\Nthen B may be worse off,
Dialogue: 0,0:11:14.29,0:11:17.76,Default,,0000,0000,0000,,even though A, B and C together\Nhave greater aggregate wealth.
Dialogue: 0,0:11:17.76,0:11:19.87,Default,,0000,0000,0000,,That's just a caution\Nto keep in mind.
Dialogue: 0,0:11:20.17,0:11:21.81,Default,,0000,0000,0000,,Now here's the big picture.
Dialogue: 0,0:11:21.81,0:11:24.66,Default,,0000,0000,0000,,Comparative advantage --\Nit applies to people,
Dialogue: 0,0:11:24.66,0:11:26.31,Default,,0000,0000,0000,,to groups, to countries.
Dialogue: 0,0:11:26.31,0:11:29.34,Default,,0000,0000,0000,,It's sometimes called\Nthe law of association.
Dialogue: 0,0:11:29.34,0:11:31.27,Default,,0000,0000,0000,,And it's not only\Na beautiful theory --
Dialogue: 0,0:11:31.27,0:11:34.03,Default,,0000,0000,0000,,it's a very positive\Nand optimistic theory
Dialogue: 0,0:11:34.03,0:11:37.25,Default,,0000,0000,0000,,because it says that we all have\Nsomething to gain from trade.
Dialogue: 0,0:11:37.25,0:11:42.21,Default,,0000,0000,0000,,It says by working together,\Nwe can increase total wealth.
Dialogue: 0,0:11:43.21,0:11:46.69,Default,,0000,0000,0000,,Moreover we can --\NI like to phrase this in terms
Dialogue: 0,0:11:46.69,0:11:50.46,Default,,0000,0000,0000,,of a politically correct slogan:\N"Diversity is strength."
Dialogue: 0,0:11:50.46,0:11:52.56,Default,,0000,0000,0000,,You've probably heard\Nthat slogan before.
Dialogue: 0,0:11:52.83,0:11:55.44,Default,,0000,0000,0000,,What comparative advantage\Nadds to this
Dialogue: 0,0:11:55.44,0:11:59.61,Default,,0000,0000,0000,,is that diversity is strength\Nwhen combined with trade --
Dialogue: 0,0:11:59.61,0:12:04.36,Default,,0000,0000,0000,,it's trade which turns diversity\Ninto strength.
Dialogue: 0,0:12:04.36,0:12:07.18,Default,,0000,0000,0000,,That's really the bottom line\Non comparative advantage.
Dialogue: 0,0:12:07.18,0:12:09.21,Default,,0000,0000,0000,,We'll be saying more\Nin future videos.
Dialogue: 0,0:12:09.21,0:12:10.24,Default,,0000,0000,0000,,Thanks.
Dialogue: 0,0:12:11.51,0:12:12.78,Default,,0000,0000,0000,,- [Narrator] If you want\Nto test yourself,
Dialogue: 0,0:12:12.78,0:12:14.34,Default,,0000,0000,0000,,click "Practice Questions."
Dialogue: 0,0:12:15.16,0:12:18.39,Default,,0000,0000,0000,,Or, if you're ready to move on,\Njust click "Next Video."