WEBVTT 00:00:00.040 --> 00:00:02.460 The following content is provided under a Creative 00:00:02.460 --> 00:00:03.870 Commons license. 00:00:03.870 --> 00:00:06.910 Your support will help MIT OpenCourseWare continue to 00:00:06.910 --> 00:00:10.560 offer high quality educational resources for free. 00:00:10.560 --> 00:00:13.460 To make a donation or view additional materials from 00:00:13.460 --> 00:00:17.390 hundreds of MIT courses, visit MIT OpenCourseWare at 00:00:17.390 --> 00:00:18.640 ocw.mit.edu. 00:00:25.180 --> 00:00:28.310 PROFESSOR: The first 2/3 of the course were covering sort 00:00:28.310 --> 00:00:33.350 of what you need to know to know basic microeconomics-- 00:00:33.350 --> 00:00:35.420 consumer theory and producer theory. 00:00:35.420 --> 00:00:37.730 And basically you can now, if you understand the material, 00:00:37.730 --> 00:00:40.970 go forth in the world as a qualified micro economist. 00:00:40.970 --> 00:00:44.350 What we're going to do for the rest of the semester is apply 00:00:44.350 --> 00:00:48.150 what we've learned and show you how you can use the tools 00:00:48.150 --> 00:00:51.220 that we've learned from basic consumer and producer theory 00:00:51.220 --> 00:00:54.130 to understand a broader range of phenomena. 00:00:54.130 --> 00:00:55.560 Really, you can think of this as-- 00:00:55.560 --> 00:00:57.700 as I talked in the first lecture about we make 00:00:57.700 --> 00:00:59.320 simplifying assumptions-- 00:00:59.320 --> 00:01:02.460 this is sort of as we bend those simplifying assumptions, 00:01:02.460 --> 00:01:04.610 and consider more and more realistic applications of 00:01:04.610 --> 00:01:05.720 these models. 00:01:05.720 --> 00:01:09.810 And the hint of what the sort of stuff you can get to see as 00:01:09.810 --> 00:01:12.100 you move on in economics and move to our other courses 00:01:12.100 --> 00:01:13.740 beyond micro. 00:01:13.740 --> 00:01:16.120 So what we're going to start with today-- and of course, 00:01:16.120 --> 00:01:18.570 unfortunately, since I'm going to cover a lot of topics, I'll 00:01:18.570 --> 00:01:20.700 give each way too little time. 00:01:20.700 --> 00:01:22.680 Including today, which is one lecture on 00:01:22.680 --> 00:01:24.880 international trade. 00:01:24.880 --> 00:01:26.900 You could take several courses on it. 00:01:26.900 --> 00:01:29.210 We have an excellent undergrad course, 14.54 on 00:01:29.210 --> 00:01:31.450 international trade. 00:01:31.450 --> 00:01:33.780 And I'm going to sort of try to shove down your throats in 00:01:33.780 --> 00:01:36.340 one lecture the key things you need to know about 00:01:36.340 --> 00:01:37.600 international trade. 00:01:37.600 --> 00:01:39.620 But if you find it interesting I urge you to 00:01:39.620 --> 00:01:41.310 follow up on this. 00:01:41.310 --> 00:01:45.030 So, thinking about this-- 00:01:45.030 --> 00:01:45.906 a good way to think about international trade is to 00:01:45.906 --> 00:01:47.560 think about an example. 00:01:47.560 --> 00:01:50.490 So let's think about Valentine's Day. 00:01:50.490 --> 00:01:51.780 Valentine's Day sort of presents 00:01:51.780 --> 00:01:53.460 an interesting conundrum. 00:01:53.460 --> 00:01:56.360 Because Valentine's Day happens in the winter. 00:01:56.360 --> 00:01:58.920 And yet, the thing you're supposed to do is give roses. 00:01:58.920 --> 00:02:01.060 Which don't grow in the winter in the US. 00:02:01.060 --> 00:02:04.180 At least not very conveniently in many places. 00:02:04.180 --> 00:02:06.000 So you've got this difficult issue that basically we're 00:02:06.000 --> 00:02:07.925 supposed to represent this holiday with something that 00:02:07.925 --> 00:02:10.550 doesn't actually come that time of year. 00:02:10.550 --> 00:02:14.450 So historically what that meant it was if you wanted to 00:02:14.450 --> 00:02:17.740 get roses for Valentine's Day you to buy them from specially 00:02:17.740 --> 00:02:19.300 heated greenhouses. 00:02:19.300 --> 00:02:22.380 Where they set up largely to supply the roses for 00:02:22.380 --> 00:02:23.020 Valentine's Day. 00:02:23.020 --> 00:02:26.420 There wasn't really a large purpose for them otherwise. 00:02:26.420 --> 00:02:29.400 However, over the past couple of decades, what's happened is 00:02:29.400 --> 00:02:31.450 instead-- instead of growing these in these specially 00:02:31.450 --> 00:02:35.080 heated greenhouses, we've started flying them in from 00:02:35.080 --> 00:02:37.090 other places, from Colombia. 00:02:37.090 --> 00:02:40.090 Where of course, Colombia's on the other side of the equator. 00:02:40.090 --> 00:02:41.550 So February is a wonderful time to 00:02:41.550 --> 00:02:43.400 grow roses in Colombia. 00:02:43.400 --> 00:02:48.263 And as a result we've started flying them in. 00:02:48.263 --> 00:02:51.160 And the typical rose you will give on Valentine's Day this 00:02:51.160 --> 00:02:53.490 year will come from Colombia. 00:02:53.490 --> 00:02:58.090 Now the issue is-- is that a good thing or a bad thing? 00:02:58.090 --> 00:03:01.580 Now on the one hand, we get cheap roses. 00:03:01.580 --> 00:03:02.240 That's good. 00:03:02.240 --> 00:03:05.460 Especially for poor college students who want to impress 00:03:05.460 --> 00:03:08.180 their valentine by sending a dozen roses. 00:03:08.180 --> 00:03:09.220 It's good they're cheap. 00:03:09.220 --> 00:03:11.820 And roses are way cheaper now than they were when I was-- 00:03:11.820 --> 00:03:15.250 even in dollar terms when I was in college giving roses. 00:03:15.250 --> 00:03:17.240 Roses are just incredibly cheap now compared to 00:03:17.240 --> 00:03:19.010 20 or 30 years ago. 00:03:19.010 --> 00:03:21.460 On the other hand, a lot of rose producers 00:03:21.460 --> 00:03:22.990 have lost their jobs. 00:03:22.990 --> 00:03:25.600 A lot of people whose livelihoods and source of 00:03:25.600 --> 00:03:29.080 income was growing these roses are now out of jobs. 00:03:29.080 --> 00:03:31.700 OK, these are typically people who are not high-skilled 00:03:31.700 --> 00:03:33.800 people who can go find another job easily. 00:03:33.800 --> 00:03:35.800 These are people who have been really displaced for something 00:03:35.800 --> 00:03:38.470 which was a specialized skill which they cannot easily use 00:03:38.470 --> 00:03:40.130 other places. 00:03:40.130 --> 00:03:45.110 And basically this trade-off is sort of a microcosm of the 00:03:45.110 --> 00:03:47.380 debate we have over international trade every day. 00:03:47.380 --> 00:03:49.190 A debate that's ongoing. 00:03:49.190 --> 00:03:51.520 Obama just came back to the G20 summit. 00:03:51.520 --> 00:03:53.650 Where there was huge discussions of the issues of 00:03:53.650 --> 00:03:54.490 international trade. 00:03:54.490 --> 00:03:56.370 It's an ongoing debate. 00:03:56.370 --> 00:04:00.040 And it's a particularly important topic right now in 00:04:00.040 --> 00:04:02.620 the US because the US is running what's called an 00:04:02.620 --> 00:04:05.740 enormous trade deficit. 00:04:05.740 --> 00:04:10.000 The trade deficit is the difference between how much we 00:04:10.000 --> 00:04:13.550 export, that is how much of our goods we sell to other 00:04:13.550 --> 00:04:16.860 countries, minus how much we import. 00:04:16.860 --> 00:04:18.029 Which is how much of goods from other 00:04:18.029 --> 00:04:19.959 countries that we buy. 00:04:19.959 --> 00:04:24.550 Currently we export about $160 billion worth 00:04:24.550 --> 00:04:26.280 of goods every month. 00:04:26.280 --> 00:04:30.000 So every month we send out $160 billion worth of goods 00:04:30.000 --> 00:04:31.290 around the world. 00:04:31.290 --> 00:04:36.460 We import about $200 billion of goods every month. 00:04:36.460 --> 00:04:38.850 So that means we have a trade deficit that's running about 00:04:38.850 --> 00:04:41.860 $40 billion. 00:04:41.860 --> 00:04:44.710 Now the question is-- is that a problem? 00:04:44.710 --> 00:04:47.400 Is it a problem that the US is systematically buying more 00:04:47.400 --> 00:04:49.380 stuff from the rest of the world than 00:04:49.380 --> 00:04:51.990 they're buying from us? 00:04:51.990 --> 00:04:55.050 And the answer is it's not necessarily a problem. 00:04:55.050 --> 00:04:58.700 And really, it might in fact be a natural outcome because 00:04:58.700 --> 00:05:01.390 of the principle that we'll focus on today-- 00:05:01.390 --> 00:05:03.015 the principle of comparative advantage. 00:05:10.910 --> 00:05:13.810 Comparative advantage is saying if some other place is 00:05:13.810 --> 00:05:17.100 particularly good at producing roses in February, then we 00:05:17.100 --> 00:05:18.990 shouldn't be that stressed about the fact that we're 00:05:18.990 --> 00:05:21.780 running a deficit of roses. 00:05:21.780 --> 00:05:26.000 That's something which is OK in terms of total efficiency. 00:05:26.000 --> 00:05:29.680 So to see that, let's focus as this rose example in a 00:05:29.680 --> 00:05:32.210 particularly simplified way. 00:05:32.210 --> 00:05:34.390 Imagine there's two countries-- 00:05:34.390 --> 00:05:36.420 the US and Colombia. 00:05:36.420 --> 00:05:38.080 And there's only two goods in the world-- 00:05:38.080 --> 00:05:40.730 roses and computers. 00:05:40.730 --> 00:05:41.840 Two countries, two good models. 00:05:41.840 --> 00:05:44.040 The standard model we work with with international trade. 00:05:44.040 --> 00:05:45.860 With two country two good models you can develop almost 00:05:45.860 --> 00:05:47.310 everything you need to know. 00:05:47.310 --> 00:05:50.860 There is no need to make it more complicated. 00:05:50.860 --> 00:05:54.000 Now, as I mentioned it's really hard to grow roses in 00:05:54.000 --> 00:05:55.040 February in the US. 00:05:55.040 --> 00:05:56.930 It's a lot easier in Colombia. 00:05:56.930 --> 00:05:59.310 On the other hand, it's much easier to produce good 00:05:59.310 --> 00:06:01.220 computers in the US than in Colombia because we have the 00:06:01.220 --> 00:06:04.290 high skilled labor force that can produce computers. 00:06:04.290 --> 00:06:06.750 So we have a thing where the US is relatively bad at 00:06:06.750 --> 00:06:08.200 producing roses in February. 00:06:08.200 --> 00:06:12.880 Colombia's relatively bad at producing computers. 00:06:12.880 --> 00:06:17.460 So the key point is that means that the opportunity cost-- 00:06:17.460 --> 00:06:19.260 remember the opportunity cost, this key concept we've come 00:06:19.260 --> 00:06:20.800 back to a couple times. 00:06:20.800 --> 00:06:24.320 The opportunity cost of producing a rose in terms of 00:06:24.320 --> 00:06:28.230 producing computers is relatively high in the US. 00:06:28.230 --> 00:06:31.000 That is to produce a rose we have to use so many resources. 00:06:31.000 --> 00:06:32.840 Those resources can be much more effectively deployed to 00:06:32.840 --> 00:06:34.880 producing computers. 00:06:34.880 --> 00:06:37.530 Likewise, in Colombia, to produce a computer would use a 00:06:37.530 --> 00:06:40.120 ton of resources that would be much more effectively deployed 00:06:40.120 --> 00:06:42.040 to produce roses. 00:06:42.040 --> 00:06:45.160 As a result we see that Colombia has a comparative 00:06:45.160 --> 00:06:47.620 advantage in roses. 00:06:47.620 --> 00:06:51.360 And the US has a comparative advantage in computers. 00:06:51.360 --> 00:06:55.530 The point is that if a country is relatively good at 00:06:55.530 --> 00:06:57.990 something then they have a comparative advantage. 00:06:57.990 --> 00:07:00.540 And it's all about relativities. 00:07:00.540 --> 00:07:02.210 Because people are going to want both. 00:07:02.210 --> 00:07:04.400 But the key thing is who's relatively good at producing 00:07:04.400 --> 00:07:05.950 one versus the other. 00:07:05.950 --> 00:07:08.210 So to see that let's go to figure 19-1. 00:07:08.210 --> 00:07:13.690 To see how we diagram this, let's go to figure 19-1. 00:07:13.690 --> 00:07:17.390 Figure 19-1 shows production possibility frontiers. 00:07:17.390 --> 00:07:19.300 You learned about these a while back. 00:07:19.300 --> 00:07:21.790 Let me remind you, a production possibility 00:07:21.790 --> 00:07:24.230 frontier we talked about in the context of a firm. 00:07:24.230 --> 00:07:27.130 It shows the trade-off between the firm's ability to produce 00:07:27.130 --> 00:07:29.040 one good versus another good. 00:07:29.040 --> 00:07:30.900 So for a firm producing two goods a production 00:07:30.900 --> 00:07:34.170 possibilities frontier is the combination of the two goods 00:07:34.170 --> 00:07:39.490 they could produce at a given level of inputs. 00:07:39.490 --> 00:07:44.730 So we talked about it from the context of firms. We can also 00:07:44.730 --> 00:07:47.480 talk about this in the context of countries. 00:07:47.480 --> 00:07:49.230 That says, we can draw a US 00:07:49.230 --> 00:07:51.000 production possibility frontier. 00:07:51.000 --> 00:07:55.600 Which is given the resources the US has, it could produce 00:07:55.600 --> 00:07:58.980 up to 2000 computers and no roses. 00:07:58.980 --> 00:08:04.770 Or 1,000 dozen roses, boxes of roses, and no computers. 00:08:04.770 --> 00:08:06.910 And let's assume it's linear in between. 00:08:06.910 --> 00:08:09.060 So the US production possibility frontier is given 00:08:09.060 --> 00:08:11.190 the resources we have-- and this is a very simplified 00:08:11.190 --> 00:08:13.620 example-- but just bear with me. 00:08:13.620 --> 00:08:15.240 Given the resources we have, we can produce 2000 computers 00:08:15.240 --> 00:08:19.710 and no roses or 1,000 boxes of roses and no computers. 00:08:19.710 --> 00:08:22.730 Or any combination in between. 00:08:22.730 --> 00:08:25.940 That's our production possibility frontier. 00:08:25.940 --> 00:08:29.750 Columbia has a production possibility frontier 00:08:29.750 --> 00:08:31.510 illustrated in the second panel. 00:08:31.510 --> 00:08:35.500 They can produce 1,000 computers and no roses. 00:08:35.500 --> 00:08:39.110 Or 2000 boxes of roses and no computers. 00:08:39.110 --> 00:08:41.280 That is, Columbia has a comparative 00:08:41.280 --> 00:08:44.870 advantage in roses. 00:08:44.870 --> 00:08:47.600 Meaning that their production possibility frontier is a lot 00:08:47.600 --> 00:08:49.760 flatter than ours is. 00:08:49.760 --> 00:08:52.480 We have a comparative advantage in computers. 00:08:52.480 --> 00:08:54.440 Meaning our production possibility frontier is a lot 00:08:54.440 --> 00:08:57.340 steeper than is Colombia's. 00:08:57.340 --> 00:09:00.490 Ignore panel C for the moment. 00:09:00.490 --> 00:09:04.210 Now remember what the slope of the production possibility 00:09:04.210 --> 00:09:05.670 frontier is. 00:09:05.670 --> 00:09:07.745 It's the marginal rate of technical substitution. 00:09:10.650 --> 00:09:13.970 It's the marginal rate at which the producer can 00:09:13.970 --> 00:09:16.100 substitute one good for another. 00:09:19.030 --> 00:09:23.920 So basically, for the US, the marginal rate of substitution 00:09:23.920 --> 00:09:26.980 of roses for computers is -2. 00:09:26.980 --> 00:09:29.450 That is you have to give up two computers to 00:09:29.450 --> 00:09:31.880 get one box of roses. 00:09:31.880 --> 00:09:34.710 In Colombia it's -1/2. 00:09:34.710 --> 00:09:37.440 You have to give up 1/2 a computer to 00:09:37.440 --> 00:09:39.580 get a box of roses. 00:09:39.580 --> 00:09:42.400 So since the marginal rate of substitution is so much higher 00:09:42.400 --> 00:09:45.600 in the US, we say that Colombia has a comparative 00:09:45.600 --> 00:09:47.300 advantage in producing roses. 00:09:50.910 --> 00:09:54.340 Now let's go further and impose tastes on consumers in 00:09:54.340 --> 00:09:55.750 each country. 00:09:55.750 --> 00:10:02.480 Let's say that tastes are such that given these production 00:10:02.480 --> 00:10:06.360 possibility frontiers, consumers in the US choose 00:10:06.360 --> 00:10:08.610 1,000 computers and 500 boxes of roses. 00:10:08.610 --> 00:10:11.260 We choose production over love. 00:10:11.260 --> 00:10:14.130 Colombia chooses love over production. 00:10:14.130 --> 00:10:16.360 Given their production possibility frontier, this is 00:10:16.360 --> 00:10:18.030 not inherently about taste necessarily. 00:10:18.030 --> 00:10:20.080 Because you have very different slopes here. 00:10:20.080 --> 00:10:21.820 But given their tastes and their production possibility 00:10:21.820 --> 00:10:24.490 frontier, they choose 500 computers and 00:10:24.490 --> 00:10:28.740 1,000 boxes of roses. 00:10:28.740 --> 00:10:30.630 Now this we call the outcome. 00:10:30.630 --> 00:10:34.940 We call this outcome the autarchy outcome. 00:10:34.940 --> 00:10:36.280 Autarchy. 00:10:36.280 --> 00:10:37.660 Which is the word-- 00:10:37.660 --> 00:10:39.500 I don't know what the hell it means, but it basically means 00:10:39.500 --> 00:10:40.620 no trading. 00:10:40.620 --> 00:10:40.860 Autarchy. 00:10:40.860 --> 00:10:42.330 I don't know where it comes from. 00:10:42.330 --> 00:10:44.320 Must be some Russian term or something. 00:10:44.320 --> 00:10:45.330 Autarchy. 00:10:45.330 --> 00:10:48.130 Which means no trading. 00:10:48.130 --> 00:10:51.360 So the no trading outcome is consumers in the US consume 00:10:51.360 --> 00:10:54.650 1,000 computers and 500 boxes of roses. 00:10:54.650 --> 00:10:57.640 Consumers in Colombia consume 500 computers and 00:10:57.640 --> 00:11:00.430 1,000 boxes of roses. 00:11:00.430 --> 00:11:06.040 Now the key point is that both the US and Colombia can be 00:11:06.040 --> 00:11:10.440 better off if we introduce trade. 00:11:10.440 --> 00:11:11.820 And how is that? 00:11:11.820 --> 00:11:16.390 Well if we introduced trade, then each country can 00:11:16.390 --> 00:11:20.650 specialize in their comparative advantage. 00:11:20.650 --> 00:11:25.110 Trade allows for specialization. 00:11:25.110 --> 00:11:27.400 That is the key advantage of trade. 00:11:27.400 --> 00:11:30.950 Their comparative advantage naturally yields 00:11:30.950 --> 00:11:32.200 specialization. 00:11:35.390 --> 00:11:36.280 Comparative advantage naturally yields 00:11:36.280 --> 00:11:38.620 specialization-- it makes sense for the US to be a 00:11:38.620 --> 00:11:41.600 computer producer and Columbia to be a rose producer. 00:11:41.600 --> 00:11:44.520 It doesn't make sense the two countries to produce both. 00:11:44.520 --> 00:11:48.100 But absent international trade they have to produce both. 00:11:48.100 --> 00:11:50.210 Because consumers want both. 00:11:50.210 --> 00:11:52.920 So if we're shut off from the world and Columbia's shut off 00:11:52.920 --> 00:11:58.170 from the world, then we end up as in figures A and B. But 00:11:58.170 --> 00:12:01.800 once we introduce trade, then we can take advantage of our 00:12:01.800 --> 00:12:03.870 relative expertise. 00:12:03.870 --> 00:12:06.770 And we get a new production possibility frontier which 00:12:06.770 --> 00:12:10.090 looks like panel C. 00:12:10.090 --> 00:12:16.720 That is, if you want more than 2000 computers-- 00:12:16.720 --> 00:12:21.270 so if you want 2000 computers and 2000 roses-- 00:12:21.270 --> 00:12:25.270 then you simply have the US produce just computers and 00:12:25.270 --> 00:12:27.800 Colombia produce just roses. 00:12:27.800 --> 00:12:30.150 And you can get 2000 of each. 00:12:30.150 --> 00:12:32.890 Now you can get 3,000 computers and no roses by 00:12:32.890 --> 00:12:34.790 having everybody produce computers. 00:12:34.790 --> 00:12:37.600 Or 3,000 roses and no computers by having everybody 00:12:37.600 --> 00:12:38.990 produce roses. 00:12:38.990 --> 00:12:40.940 So you know production possibility frontier has its 00:12:40.940 --> 00:12:46.330 sort of wedge point that 2000-2000 intersection. 00:12:46.330 --> 00:12:47.890 You can label that point the point of specialization where 00:12:47.890 --> 00:12:49.940 those two dashed lines hit the solid line. 00:12:49.940 --> 00:12:51.560 That's the point of specialization, pure 00:12:51.560 --> 00:12:52.670 specialization. 00:12:52.670 --> 00:12:56.280 That's the point where the US does just what it's good at. 00:12:56.280 --> 00:12:59.170 And Colombia does just what it's good at. 00:12:59.170 --> 00:13:01.260 Of course you could have other combinations too. 00:13:01.260 --> 00:13:02.620 And that's what leads to this bent 00:13:02.620 --> 00:13:04.300 production possibility frontier. 00:13:04.300 --> 00:13:06.950 But the key point is this joint production possibility 00:13:06.950 --> 00:13:10.420 frontier is further out than what any country could have 00:13:10.420 --> 00:13:13.310 produced on its own. 00:13:13.310 --> 00:13:15.550 We've increased the opportunity set. 00:13:15.550 --> 00:13:19.490 Specialization has led to a larger opportunity set. 00:13:22.650 --> 00:13:24.670 A larger opportunity set-- we've expanded the opportunity 00:13:24.670 --> 00:13:27.195 set for the world by allowing countries to specialize. 00:13:30.370 --> 00:13:35.500 And the result of that you can see in the next figure. 00:13:35.500 --> 00:13:40.690 In figure 19-2 which shows gains from trade. 00:13:40.690 --> 00:13:42.320 So what this figure shows-- 00:13:42.320 --> 00:13:44.320 this is the same autarchy figure from 00:13:44.320 --> 00:13:45.970 panels A and B before. 00:13:45.970 --> 00:13:47.220 I've just added some more labels. 00:13:50.130 --> 00:13:53.640 So what we see is, in autarchy, we're at 00:13:53.640 --> 00:13:55.760 point C- sub US. 00:13:55.760 --> 00:13:58.380 With the US producing and consuming 1,000 computers and 00:13:58.380 --> 00:14:02.540 500 boxes of roses. 00:14:02.540 --> 00:14:06.180 If we move to specialization, move to international trade, 00:14:06.180 --> 00:14:10.440 what happens is the US moves to producing 2000 00:14:10.440 --> 00:14:13.040 computers at Q-US. 00:14:13.040 --> 00:14:15.825 And, likewise, looking at the second panel, Colombia moves 00:14:15.825 --> 00:14:19.033 to producing 2000 box of roses at Q-CO. 00:14:21.960 --> 00:14:25.650 And US consumers now increase their consumption of both 00:14:25.650 --> 00:14:28.760 roses and computers. 00:14:28.760 --> 00:14:31.350 As do Colombian consumers. 00:14:31.350 --> 00:14:37.030 And you end up with total consumption of 2000 computers 00:14:37.030 --> 00:14:37.980 and 2000 roses. 00:14:37.980 --> 00:14:41.310 So the US consumes 1250 computers and Colombia 00:14:41.310 --> 00:14:42.840 consumes 750. 00:14:42.840 --> 00:14:44.440 And the flip for roses. 00:14:44.440 --> 00:14:46.840 So we are learning that Colombians, even at the same 00:14:46.840 --> 00:14:49.450 price, do prefer love over production. 00:14:49.450 --> 00:14:52.450 But nonetheless, the bottom line is, both sets of 00:14:52.450 --> 00:14:54.600 consumers are better off. 00:14:54.600 --> 00:14:57.610 Both sets of consumers are consuming at a higher point 00:14:57.610 --> 00:14:59.870 than was possible without trade. 00:14:59.870 --> 00:15:02.420 It's magic. 00:15:02.420 --> 00:15:05.620 The magic is that simply by letting them trade we have 00:15:05.620 --> 00:15:08.210 made both countries better off. 00:15:08.210 --> 00:15:11.790 And the magic, the key to the magic, is specialization and 00:15:11.790 --> 00:15:13.110 comparative advantage. 00:15:13.110 --> 00:15:16.270 If the US and Colombia were identical in terms of their 00:15:16.270 --> 00:15:19.900 production possibility frontiers then you should be 00:15:19.900 --> 00:15:23.940 able to see that there would be no gains from trade. 00:15:23.940 --> 00:15:25.550 If they had the same production possibility 00:15:25.550 --> 00:15:29.180 frontier, if in A and B the slopes were the same, then the 00:15:29.180 --> 00:15:31.260 joint production possibility frontier would be identical to 00:15:31.260 --> 00:15:32.620 what's in each country. 00:15:32.620 --> 00:15:34.500 There would be no gains from trade. 00:15:34.500 --> 00:15:36.990 Gains from trade come from the fact that these production 00:15:36.990 --> 00:15:39.370 possibility frontiers have different slopes. 00:15:39.370 --> 00:15:41.230 That there's comparative advantage in one country and 00:15:41.230 --> 00:15:42.070 not another. 00:15:42.070 --> 00:15:43.320 Which allows specialization. 00:15:45.560 --> 00:15:49.470 So, basically, the key insight of international trade-- and 00:15:49.470 --> 00:15:52.660 once again I'm doing now in 50 minutes what you do in 12 00:15:52.660 --> 00:15:54.610 lectures when you get it right. 00:15:54.610 --> 00:15:59.700 But the rough insight is that comparative advantage yields 00:15:59.700 --> 00:16:02.550 specialization, yields gains from trade. 00:16:02.550 --> 00:16:04.480 That's sort of the chain of logic to be 00:16:04.480 --> 00:16:07.310 thinking about this. 00:16:07.310 --> 00:16:09.111 Questions about that? 00:16:09.111 --> 00:16:10.524 Yeah? 00:16:10.524 --> 00:16:12.408 AUDIENCE: If we're going to adjust to international 00:16:12.408 --> 00:16:12.879 situations? 00:16:12.879 --> 00:16:13.821 Or could it be any sort of 00:16:13.821 --> 00:16:15.240 specialization between two companies? 00:16:15.240 --> 00:16:17.060 PROFESSOR: Any specialization between two companies. 00:16:17.060 --> 00:16:18.620 So just we learned about this originally in 00:16:18.620 --> 00:16:20.340 the context of companies. 00:16:20.340 --> 00:16:22.330 Same issue. 00:16:22.330 --> 00:16:23.730 In the business world they have a term for this. 00:16:23.730 --> 00:16:24.530 What do they call it? 00:16:24.530 --> 00:16:26.110 Synergy. 00:16:26.110 --> 00:16:26.990 You all know that word, you've got to if you're going to 00:16:26.990 --> 00:16:27.490 business school. 00:16:27.490 --> 00:16:29.070 Synergy. 00:16:29.070 --> 00:16:31.780 Synergy means that somehow you put two companies together and 00:16:31.780 --> 00:16:34.440 they can produce the same stuff better. 00:16:34.440 --> 00:16:36.920 Synergy is a fancy name for this. 00:16:36.920 --> 00:16:39.950 Which is the idea is that there may be gains from 00:16:39.950 --> 00:16:42.360 specialization even within a company. 00:16:42.360 --> 00:16:47.970 But if you take the old example, take two shoe 00:16:47.970 --> 00:16:51.360 companies, both producing left and right shoes inefficiently 00:16:51.360 --> 00:16:52.220 and they could specialize. 00:16:52.220 --> 00:16:53.630 And one could do better producing left shoes and one 00:16:53.630 --> 00:16:54.610 at right shoes. 00:16:54.610 --> 00:16:55.730 You put them together and overall you 00:16:55.730 --> 00:16:57.050 can have more shoes. 00:16:57.050 --> 00:16:58.610 That's actually a pretty stupid example, 00:16:58.610 --> 00:17:00.020 but you get the point. 00:17:00.020 --> 00:17:04.880 That basically the same principle can occur whenever 00:17:04.880 --> 00:17:06.839 there are gains from trade. 00:17:06.839 --> 00:17:09.079 Whenever there's comparative advantage of specialization 00:17:09.079 --> 00:17:10.790 you make gains from trade. 00:17:10.790 --> 00:17:11.680 Good question. 00:17:11.680 --> 00:17:12.930 Other questions? 00:17:14.750 --> 00:17:17.440 Now, that raises the interesting question of-- well 00:17:17.440 --> 00:17:19.140 these comparative advantage things sound great. 00:17:19.140 --> 00:17:20.180 Where can I get one? 00:17:20.180 --> 00:17:22.819 Where do comparative advantages come from? 00:17:22.819 --> 00:17:25.710 And there's really two sources of comparative advantages. 00:17:25.710 --> 00:17:27.800 Comparative advantage in international trade. 00:17:27.800 --> 00:17:29.670 So where does comparative advantage come from? 00:17:29.670 --> 00:17:32.220 One is differences in factor endowment. 00:17:37.510 --> 00:17:39.250 Differences in factor endowment. 00:17:39.250 --> 00:17:43.300 What that means, is that for example, Canada 00:17:43.300 --> 00:17:46.220 has a ton of trees. 00:17:46.220 --> 00:17:48.040 Everywhere. 00:17:48.040 --> 00:17:50.930 Canada is endowed with an enormous 00:17:50.930 --> 00:17:52.920 amount of lumber resources. 00:17:52.920 --> 00:17:54.690 With that factor very well. 00:17:54.690 --> 00:17:57.590 So Canada is an enormous exporter of 00:17:57.590 --> 00:17:59.440 lumber and paper products. 00:17:59.440 --> 00:18:01.210 Because they happen to have the main thing you need for 00:18:01.210 --> 00:18:05.320 that which is unbelievable amounts of trees, everywhere. 00:18:05.320 --> 00:18:11.620 So Canada can specialize in exporting lumber and paper. 00:18:11.620 --> 00:18:14.430 So now that gives them a comparative 00:18:14.430 --> 00:18:16.940 advantage in that area. 00:18:16.940 --> 00:18:18.270 Now let me ask you another question. 00:18:18.270 --> 00:18:20.930 Why does China export most of the world's clothes now? 00:18:24.500 --> 00:18:25.450 What? 00:18:25.450 --> 00:18:25.980 AUDIENCE: [INAUDIBLE] 00:18:25.980 --> 00:18:26.760 PROFESSOR: Cheap labor. 00:18:26.760 --> 00:18:28.520 It's not that they have cheaper textiles. 00:18:28.520 --> 00:18:30.850 It's not that the cloth itself-- 00:18:30.850 --> 00:18:32.940 and I realize that the silkworms are in China. 00:18:32.940 --> 00:18:34.990 But not like the actual production of cloth is that 00:18:34.990 --> 00:18:35.560 much cheaper. 00:18:35.560 --> 00:18:37.980 It's that clothes are primarily a 00:18:37.980 --> 00:18:39.950 labor intensive good. 00:18:39.950 --> 00:18:42.190 And the labor is cheapest in China. 00:18:42.190 --> 00:18:43.930 So they have a factor endowment. 00:18:43.930 --> 00:18:46.260 They have an advantage, comparative advantage, in 00:18:46.260 --> 00:18:48.570 labor intensive goods. 00:18:48.570 --> 00:18:53.120 So China, with international trade, will produce a 00:18:53.120 --> 00:18:55.140 disproportionate share of labor intensive goods. 00:18:55.140 --> 00:18:57.580 Because they can specialize in labor intensive goods. 00:18:57.580 --> 00:19:00.070 And make them cheaper for the rest of the world. 00:19:00.070 --> 00:19:05.270 So likewise, a sweatshirt that you would go and buy today-- 00:19:05.270 --> 00:19:07.350 especially if you go and buy it at a not top end store. 00:19:07.350 --> 00:19:11.270 At an Old Navy or even at a Costco. 00:19:11.270 --> 00:19:13.930 Is literally in dollar terms cheaper than what I paid for 00:19:13.930 --> 00:19:15.530 that same sweatshirt when I was in college 00:19:15.530 --> 00:19:18.280 in the early 1980s. 00:19:18.280 --> 00:19:20.240 Because they're just produced incredibly 00:19:20.240 --> 00:19:21.040 cheaply in China now. 00:19:21.040 --> 00:19:22.290 We bring them in and they're just cheap. 00:19:25.060 --> 00:19:32.080 Goods where you can specialize in that are going to be-- 00:19:32.080 --> 00:19:35.220 when you take advantage of specialization 00:19:35.220 --> 00:19:37.170 will be a lot cheaper. 00:19:37.170 --> 00:19:39.950 So that's one reason why you see comparative advantage. 00:19:42.690 --> 00:19:47.220 The second reason is going to be technological leadership. 00:19:54.620 --> 00:19:56.340 Technological leadership. 00:19:56.340 --> 00:20:01.320 So, for example, Japan has no natural comparative advantage 00:20:01.320 --> 00:20:03.260 of producing cars. 00:20:03.260 --> 00:20:04.780 There's no reason why Japan should have a comparative 00:20:04.780 --> 00:20:07.340 advantage of producing cars over the US. 00:20:07.340 --> 00:20:11.170 Except they developed the technology to more efficiently 00:20:11.170 --> 00:20:14.970 mass produce the modern automobile. 00:20:14.970 --> 00:20:19.130 As a result of that technological leadership they 00:20:19.130 --> 00:20:22.830 gave themselves, essentially, comparative advantage. 00:20:22.830 --> 00:20:25.940 Now, once that technology becomes public, the production 00:20:25.940 --> 00:20:26.600 shifts elsewhere. 00:20:26.600 --> 00:20:29.320 So now China is a major producer of cars. 00:20:29.320 --> 00:20:32.170 Basically copy-catting the technology developed in Japan. 00:20:32.170 --> 00:20:33.640 So it does move elsewhere. 00:20:33.640 --> 00:20:35.790 Unlike factor endowments-- 00:20:35.790 --> 00:20:37.130 if the US wanted to compete with Canada I guess we could 00:20:37.130 --> 00:20:39.370 plant trees and in 50 years we would compete. 00:20:39.370 --> 00:20:41.860 But factor endowments are kind of hard to compete on. 00:20:41.860 --> 00:20:44.895 Technology is potentially a little bit easier because you 00:20:44.895 --> 00:20:47.430 can reverse engineer things. 00:20:47.430 --> 00:20:48.320 So once again, the 00:20:48.320 --> 00:20:49.930 technology's shifting to China. 00:20:49.930 --> 00:20:51.940 So really the answer is in the long run everything's going to 00:20:51.940 --> 00:20:53.480 be made in China. 00:20:53.480 --> 00:20:55.610 Because they've got the cheap labor. 00:20:55.610 --> 00:20:59.200 And they're adopting the technology. 00:20:59.200 --> 00:21:01.270 And once again, to quote towards our most important 00:21:01.270 --> 00:21:04.010 sense of cultural relevance, there's the episode of the 00:21:04.010 --> 00:21:07.390 Simpsons where Homer says, don't worry we're fine. 00:21:07.390 --> 00:21:10.240 We're going to rule-- 00:21:10.240 --> 00:21:11.340 our country's going to rule the world. 00:21:11.340 --> 00:21:11.910 We're fine in the future. 00:21:11.910 --> 00:21:14.610 He goes, wait a second we're China, right? 00:21:14.610 --> 00:21:18.610 So basically China is doing very well because they've got 00:21:18.610 --> 00:21:20.920 these factor endowments-- 00:21:20.920 --> 00:21:24.760 these great factor endowments and because they are adopting 00:21:24.760 --> 00:21:25.980 technology as well. 00:21:25.980 --> 00:21:29.164 What's interesting about this is this really leads to some 00:21:29.164 --> 00:21:30.240 more interesting policy issues. 00:21:30.240 --> 00:21:31.410 Once again, factor endowment you can't 00:21:31.410 --> 00:21:32.820 do a whole lot about. 00:21:32.820 --> 00:21:36.700 The interesting policy issues are in technological progress. 00:21:36.700 --> 00:21:38.890 This is an argument that many people make for subsidizing 00:21:38.890 --> 00:21:39.600 new technologies. 00:21:39.600 --> 00:21:41.510 So you often hear President Obama saying, we need to 00:21:41.510 --> 00:21:43.370 subsidize green technologies. 00:21:43.370 --> 00:21:44.800 This is the wave of the future. 00:21:44.800 --> 00:21:47.290 The idea, what he's saying implicitly is if we get the 00:21:47.290 --> 00:21:50.640 technological leadership, we can make the green products 00:21:50.640 --> 00:21:51.300 that are exported. 00:21:51.300 --> 00:21:51.790 Not the color-- 00:21:51.790 --> 00:21:54.450 I mean environmental stuff-- that can be exported to the 00:21:54.450 --> 00:21:55.410 rest of the world. 00:21:55.410 --> 00:21:56.880 And that's the argument that he's making. 00:21:59.490 --> 00:22:00.740 Question about that? 00:22:02.920 --> 00:22:06.330 Now let's talk about where we started the lecture, which is 00:22:06.330 --> 00:22:07.560 is trade a good thing or a bad thing? 00:22:07.560 --> 00:22:10.800 I just talked about how trade can greatly increase 00:22:10.800 --> 00:22:12.670 consumption possibilities. 00:22:12.670 --> 00:22:16.960 But why haven't we talked about the consumers? 00:22:16.960 --> 00:22:20.380 What about overall social welfare. 00:22:20.380 --> 00:22:23.300 And the answer is that trade unambiguously 00:22:23.300 --> 00:22:25.470 increases social welfare. 00:22:25.470 --> 00:22:30.640 That trade is unambiguously a good thing to do. 00:22:30.640 --> 00:22:36.630 So to see that let's go to the next series of figures. 00:22:36.630 --> 00:22:39.000 Start with figure 19-3. 00:22:39.000 --> 00:22:41.440 So let's start with the market for roses 00:22:41.440 --> 00:22:42.990 and imagine we have-- 00:22:42.990 --> 00:22:45.410 [INAUDIBLE] autarchy is sometimes spelled with a K, 00:22:45.410 --> 00:22:47.200 sometimes with a CH, I don't know what the right way to 00:22:47.200 --> 00:22:48.230 spell it is. 00:22:48.230 --> 00:22:50.490 But anyway, you have autarchy. 00:22:50.490 --> 00:22:52.960 So the US-- imagine the old days where we produced all our 00:22:52.960 --> 00:22:54.890 roses and we're at some equilibrium with some consumer 00:22:54.890 --> 00:22:56.620 surplus and producer surplus. 00:22:56.620 --> 00:23:02.090 So we produce Q sub A roses at a price p sub A. 00:23:02.090 --> 00:23:04.720 Now, in figure 19-4 we're going to introduce 00:23:04.720 --> 00:23:05.480 international trade. 00:23:05.480 --> 00:23:09.110 It's a little confusing, so let's go through it slowly. 00:23:09.110 --> 00:23:11.450 Figure 19-4. 00:23:11.450 --> 00:23:14.520 You can find on that figure the domestic supply and the 00:23:14.520 --> 00:23:15.770 domestic demand. 00:23:15.770 --> 00:23:20.670 And they intersect at point A. Figure 19-4, domestic supply 00:23:20.670 --> 00:23:25.790 and domestic demand intersect at A. Which is once again a 00:23:25.790 --> 00:23:27.600 quantiy of Q sub A and a price of P sub a. 00:23:30.110 --> 00:23:36.310 Now let's say that what happens is we now allow 00:23:36.310 --> 00:23:38.740 imports of roses. 00:23:38.740 --> 00:23:40.510 We now trade with Colombia for roses. 00:23:40.510 --> 00:23:43.220 What that does is that means now instead of just drawing on 00:23:43.220 --> 00:23:46.100 the domestic supply, we can now draw on the 00:23:46.100 --> 00:23:47.990 world's supply of roses. 00:23:47.990 --> 00:23:49.420 We don't have to just rely on domestic supply. 00:23:49.420 --> 00:23:52.110 Well, that by definition has shifted further out. 00:23:52.110 --> 00:23:53.860 And it's shifted further out because other countries 00:23:53.860 --> 00:23:57.080 countries can produce roses so much more cheaply than we can. 00:23:57.080 --> 00:24:00.680 So we can rely on the world's supply of roses. 00:24:00.680 --> 00:24:03.130 Remember my cotton example where you first buy from the 00:24:03.130 --> 00:24:04.200 cheapest country, then the next 00:24:04.200 --> 00:24:05.580 cheapest country, et cetera. 00:24:05.580 --> 00:24:07.270 This is what we're saying-- if the US was the cheapest 00:24:07.270 --> 00:24:09.960 producer of roses, this wouldn't shift out. 00:24:09.960 --> 00:24:12.180 But since the US is not the cheapest producer of roses 00:24:12.180 --> 00:24:14.150 this shifts out to world supply. 00:24:14.150 --> 00:24:18.250 And we get to a new equilibrium at 00:24:18.250 --> 00:24:19.890 quantity C sub t. 00:24:23.620 --> 00:24:26.130 That's the new quantity of roses we consume. 00:24:26.130 --> 00:24:27.380 And a lower price P sub w. 00:24:30.260 --> 00:24:32.430 The horizontal line's a little distracting, actually. 00:24:32.430 --> 00:24:35.755 But basically what you have here-- the horizontal line is 00:24:35.755 --> 00:24:39.190 just showing the price in autarchy and the world price. 00:24:39.190 --> 00:24:41.805 But the bottom line is, what you get you get is you get 00:24:41.805 --> 00:24:47.823 this new equilibrium with a quantity C sub t and 00:24:47.823 --> 00:24:48.950 a price P sub w. 00:24:48.950 --> 00:24:53.060 And in particular, what we're seeing is that total domestic 00:24:53.060 --> 00:24:55.190 consumption of roses has increased. 00:24:55.190 --> 00:24:56.940 But domestic production has fallen. 00:24:56.940 --> 00:25:00.480 Because look, the new price intersects the supply 00:25:00.480 --> 00:25:04.040 curve at Q sub t. 00:25:04.040 --> 00:25:08.540 So what happens is at that new lower price P sub w, US rose 00:25:08.540 --> 00:25:10.180 producers aren't actually producing as much. 00:25:10.180 --> 00:25:15.420 So US domestic production falls from Q sub a to Q sub t. 00:25:15.420 --> 00:25:19.310 But US consumption rises from Q sub a to C sub t. 00:25:19.310 --> 00:25:22.330 The difference is imports. 00:25:22.330 --> 00:25:25.020 Production falls from Q sub a to Q sub t. 00:25:25.020 --> 00:25:27.630 Consumption rises from Q sub a to C sub t. 00:25:27.630 --> 00:25:30.060 The difference is imports. 00:25:30.060 --> 00:25:31.320 And that's what happens when we allow 00:25:31.320 --> 00:25:33.670 Colombia to send us roses. 00:25:33.670 --> 00:25:35.480 What are the welfare implications of that? 00:25:35.480 --> 00:25:38.300 Let's go to figure 19-5. 00:25:38.300 --> 00:25:41.530 And what you can see is we can show you the welfare 00:25:41.530 --> 00:25:42.100 implications. 00:25:42.100 --> 00:25:46.400 Previously consumer surplus was W. Producer surplus was X 00:25:46.400 --> 00:25:51.040 plus that other white triangle below X. Now what's happened? 00:25:51.040 --> 00:25:54.880 Consumer surplus has gone up by X, because consumers have 00:25:54.880 --> 00:25:56.750 gained that plus z. 00:25:56.750 --> 00:26:01.570 So consumers have gained that entire trapezoid, X plus Z. 00:26:01.570 --> 00:26:06.420 Producers have lost x. 00:26:06.420 --> 00:26:10.180 Producers have lost that trapezoid, X. So in total 00:26:10.180 --> 00:26:13.400 we've gained Z. We've gained that entire triangle, Z. Z is 00:26:13.400 --> 00:26:16.260 the entire triangle on both sides of the dashed line. 00:26:16.260 --> 00:26:20.130 So we've gained all of Z. Consumers gained X plus Z, 00:26:20.130 --> 00:26:25.990 producers lost X. We've gained Z. So overall we've increased 00:26:25.990 --> 00:26:30.550 welfare in the US. 00:26:30.550 --> 00:26:35.170 So basically consumers win, producers lose. 00:26:35.170 --> 00:26:36.480 And that's the problem. 00:26:36.480 --> 00:26:39.070 The political problem we have. And I'll come back to this. 00:26:39.070 --> 00:26:41.500 What you can see is consumers win, producers lose. 00:26:41.500 --> 00:26:45.550 But by definition, consumers win more than producers lose. 00:26:45.550 --> 00:26:47.560 So overall, social surplus has gone up. 00:26:50.270 --> 00:26:53.060 Now that's the case of imports. 00:26:53.060 --> 00:26:53.970 Now what about exports? 00:26:53.970 --> 00:26:55.260 Well if imports make us better, do 00:26:55.260 --> 00:26:57.070 exports make us worse? 00:26:57.070 --> 00:26:58.800 We just said imports make us better. 00:26:58.800 --> 00:26:59.470 What about exports? 00:26:59.470 --> 00:27:03.770 Well let's look at that in figure 19-6. 00:27:03.770 --> 00:27:06.720 Now figure 19-6 shows what happens with exports. 00:27:06.720 --> 00:27:10.930 Once again we start at point A, the domestic outcome, point 00:27:10.930 --> 00:27:18.400 A. And now we're talking about computers. 00:27:18.400 --> 00:27:21.100 So now the US is going to export computers. 00:27:21.100 --> 00:27:27.550 What that means is that the supply of computers to people 00:27:27.550 --> 00:27:29.560 in the US is going to fall. 00:27:29.560 --> 00:27:29.890 why? 00:27:29.890 --> 00:27:31.910 Because a bunch of them are going to get sent away. 00:27:31.910 --> 00:27:35.480 So it used to be US consumers got to consume on that 00:27:35.480 --> 00:27:38.040 domestic supply-- 00:27:38.040 --> 00:27:40.470 so US producers used domestic supply curve. 00:27:40.470 --> 00:27:43.840 And we had domestic demand intersecting at A. Well now, 00:27:43.840 --> 00:27:45.660 domestic producers are shipping a bunch of the 00:27:45.660 --> 00:27:49.380 computers to Japan, and China, and Colombia. 00:27:49.380 --> 00:27:52.710 As a result, the supply has shifted in. 00:27:52.710 --> 00:27:53.820 Because they don't have as many computers 00:27:53.820 --> 00:27:55.410 to sell in the US. 00:27:55.410 --> 00:27:58.070 That means the price rises. 00:27:58.070 --> 00:28:01.640 So because of exports we pay more for our computers. 00:28:01.640 --> 00:28:03.040 And it sort of makes sense, right? 00:28:03.040 --> 00:28:03.910 They produce a bunch of computers. 00:28:03.910 --> 00:28:06.480 If there's been a great demand for them elsewhere and we want 00:28:06.480 --> 00:28:08.170 them too, we're going to have to pay a higher price. 00:28:08.170 --> 00:28:08.880 Because we're competing with other 00:28:08.880 --> 00:28:11.840 people for those computers. 00:28:11.840 --> 00:28:14.940 So now that supply curve has shifted up. 00:28:14.940 --> 00:28:22.540 And now we end up that US consumers only want to C sub t 00:28:22.540 --> 00:28:26.920 computers at a new higher price a P sub w. 00:28:26.920 --> 00:28:35.290 But the world is now saying, well we are interested in the 00:28:35.290 --> 00:28:39.810 total amount of computer we want is Q sub t. 00:28:39.810 --> 00:28:43.020 So what that world price of sub w-- 00:28:43.020 --> 00:28:45.146 the domestic producers say great, at that higher price P 00:28:45.146 --> 00:28:49.490 sub w, I'm delighted to produce Q sub t computers. 00:28:49.490 --> 00:28:51.970 So what I'm going to do is I'm going to produce Q sub t, I'm 00:28:51.970 --> 00:28:56.060 going to ship Q sub t minus C sub t elsewhere. 00:28:56.060 --> 00:28:58.610 And US consumers will consume C sub t. 00:28:58.610 --> 00:29:01.440 So consumers are worse off. 00:29:01.440 --> 00:29:03.130 So unlike imports which make consumers better off, 00:29:03.130 --> 00:29:04.640 consumers are worse off. 00:29:04.640 --> 00:29:05.960 So is trade bad? 00:29:05.960 --> 00:29:06.890 Well, no. 00:29:06.890 --> 00:29:07.890 Trade's not bad. 00:29:07.890 --> 00:29:10.360 But the bottom line is, domestic producers are going 00:29:10.360 --> 00:29:14.460 to gain more than domestic consumers lose. 00:29:14.460 --> 00:29:16.120 The bottom line is we'll be better off from exports. 00:29:16.120 --> 00:29:18.850 But in this case, consumers lose and producers win. 00:29:21.450 --> 00:29:23.000 Society gains either way. 00:29:23.000 --> 00:29:26.040 Society gains from imports because consumers gain more 00:29:26.040 --> 00:29:27.470 than producers lose. 00:29:27.470 --> 00:29:29.420 Society gains from exports. 00:29:29.420 --> 00:29:36.490 Because producers gain more than consumers lose. 00:29:36.490 --> 00:29:41.080 So what that means is that any form of trade is going to make 00:29:41.080 --> 00:29:42.630 the US better off. 00:29:42.630 --> 00:29:46.040 But also inevitably create losers. 00:29:46.040 --> 00:29:47.710 Any form of trade will make the US better off but 00:29:47.710 --> 00:29:50.870 inevitably create losers. 00:29:50.870 --> 00:29:54.490 And the problem is that those losers are very loud in the 00:29:54.490 --> 00:29:56.990 political process. 00:29:56.990 --> 00:29:59.940 And the winners are not so loud. 00:29:59.940 --> 00:30:05.290 So, for example, if you polled US consumers and said, how 00:30:05.290 --> 00:30:07.580 much are you saving on your sweat shirts? 00:30:07.580 --> 00:30:10.390 Because we import textiles from China. 00:30:10.390 --> 00:30:11.840 They wouldn't know. 00:30:11.840 --> 00:30:13.600 I mean they'd say a couple bucks what 00:30:13.600 --> 00:30:15.180 in fact it's maybe-- 00:30:15.180 --> 00:30:17.380 they'd say I don't know, 10% of the price when it's maybe 00:30:17.380 --> 00:30:19.290 more like 50% of the price. 00:30:19.290 --> 00:30:22.060 But if you polled US textile manufacturers, or guys who 00:30:22.060 --> 00:30:24.370 have left the business, and said how much did you lose 00:30:24.370 --> 00:30:26.740 because of imports of China, they'd tell you exactly how 00:30:26.740 --> 00:30:29.780 much they lost. They'd tell you 10 times as much. 00:30:29.780 --> 00:30:32.020 But they know how much they lost. And they go to their 00:30:32.020 --> 00:30:34.980 politicians and they say, hey we're losing jobs here. 00:30:34.980 --> 00:30:36.570 And the consumers don't come saying, hey I'm getting 00:30:36.570 --> 00:30:39.020 cheaper sweatshirts here. 00:30:39.020 --> 00:30:46.040 As a result, there's huge political backlash against 00:30:46.040 --> 00:30:48.500 imports in particular. 00:30:48.500 --> 00:30:56.180 So that leads to policies which limit imports into 00:30:56.180 --> 00:30:58.560 countries like the US. 00:30:58.560 --> 00:31:08.740 Like tariffs, which are essentially taxes. 00:31:08.740 --> 00:31:12.870 Tariffs, which are essentially taxes on goods imported into 00:31:12.870 --> 00:31:15.030 the US to us. 00:31:15.030 --> 00:31:17.440 Which are taxes on goods that are imported into the US. 00:31:17.440 --> 00:31:21.510 Or quotas, which are limits on how much companies 00:31:21.510 --> 00:31:22.760 can send to the US. 00:31:28.870 --> 00:31:32.740 What I think what you should know now is by definition-- 00:31:32.740 --> 00:31:34.920 since I said free trade is good, these things 00:31:34.920 --> 00:31:36.380 are going to be bad. 00:31:36.380 --> 00:31:37.820 And they're going to be bad-- 00:31:37.820 --> 00:31:39.550 things like tariffs are going to be bad because they're 00:31:39.550 --> 00:31:42.930 going to hurt US consumers more than they're going to 00:31:42.930 --> 00:31:45.110 help US producers. 00:31:45.110 --> 00:31:52.310 So to see that let's go to figure 19-8. 00:31:52.310 --> 00:31:53.800 Let's show what happens with a tariff. 00:32:00.070 --> 00:32:04.000 This is saying that now we're starting the world with trade. 00:32:04.000 --> 00:32:08.940 So the world with trade we're producing C sub 1, which is 00:32:08.940 --> 00:32:11.250 where domestic demand equals world supply at 00:32:11.250 --> 00:32:14.440 a price P sub w. 00:32:14.440 --> 00:32:16.270 That's where we were with trade. 00:32:16.270 --> 00:32:20.090 Now the US government comes in and levies a tariff. 00:32:20.090 --> 00:32:23.420 And says that that tariff is going to be the difference 00:32:23.420 --> 00:32:24.900 between P sub w and P sub t. 00:32:24.900 --> 00:32:26.120 So that's the amount of the tariff. 00:32:26.120 --> 00:32:29.750 They are going to raise the price essentially to P sub t. 00:32:29.750 --> 00:32:32.600 They're essentially going to levy a tax on roses that come 00:32:32.600 --> 00:32:34.060 in from Colombia. 00:32:34.060 --> 00:32:38.460 What that does is that means that consumers now, at that 00:32:38.460 --> 00:32:42.690 higher price, only want C sub 2 roses. 00:32:42.690 --> 00:32:44.800 That's where that intersects demand. 00:32:44.800 --> 00:32:47.610 So they wanted C sub 1 roses without the tariff. 00:32:47.610 --> 00:32:49.760 But now with the tariff at that higher price intersects 00:32:49.760 --> 00:32:51.755 demand at C sub 2, they only want C sub 2 roses. 00:32:54.360 --> 00:32:58.990 Producers, given that they have to pay the tariff, are 00:32:58.990 --> 00:33:02.280 only going to produce Q sub 2. 00:33:04.780 --> 00:33:10.940 Domestic producers are now going to produce Q sub 2 roses 00:33:10.940 --> 00:33:12.750 because they get a higher price. 00:33:12.750 --> 00:33:16.220 So domestic consumers are consuming less. 00:33:16.220 --> 00:33:18.750 Domestic producers are producing more. 00:33:18.750 --> 00:33:20.060 Right, because now that price is higher. 00:33:20.060 --> 00:33:22.310 So now you could reopen those heated greenhouses because 00:33:22.310 --> 00:33:23.950 it's worth it now. 00:33:23.950 --> 00:33:26.870 And we end up with a much smaller amount of imports. 00:33:26.870 --> 00:33:28.790 So in that sense the tariff worked. 00:33:28.790 --> 00:33:30.650 So in the sense that the goal of the tariff was to reduce 00:33:30.650 --> 00:33:31.760 imports, it worked. 00:33:31.760 --> 00:33:34.820 Consumers wanted less from Colombia. 00:33:34.820 --> 00:33:37.190 Producers were happy to produce more. 00:33:37.190 --> 00:33:39.270 So imports fell. 00:33:39.270 --> 00:33:41.520 So in that sense tariffs worked. 00:33:41.520 --> 00:33:44.110 They've lowered imports. 00:33:44.110 --> 00:33:45.280 But what do they do to welfare? 00:33:45.280 --> 00:33:50.620 Well that's our final figure 19-9. 00:33:50.620 --> 00:33:52.280 What do they do to welfare? 00:33:52.280 --> 00:33:56.660 Well what you can see is domestic producers gained a 00:33:56.660 --> 00:34:01.770 trapezoid A. Their producer surplus, which used to be that 00:34:01.770 --> 00:34:07.040 little white triangle below A, became that entire triangle 00:34:07.040 --> 00:34:09.190 that includes A and the white part below it. 00:34:09.190 --> 00:34:13.910 So their producer surplus became A. They gained A in 00:34:13.910 --> 00:34:15.010 producer surplus. 00:34:15.010 --> 00:34:17.389 But consumers lost a ton. 00:34:17.389 --> 00:34:23.530 They lost the entire trapezoid A plus B plus C plus D. They 00:34:23.530 --> 00:34:26.830 lost that entire trapezoid gone up to higher prices. 00:34:26.830 --> 00:34:28.400 And now we have one other player which is the 00:34:28.400 --> 00:34:29.159 government. 00:34:29.159 --> 00:34:30.300 The government made some money. 00:34:30.300 --> 00:34:31.670 This is a tax. 00:34:31.670 --> 00:34:32.630 How much did the government make? 00:34:32.630 --> 00:34:35.590 Well we taxed all imports by the amount P sub 00:34:35.590 --> 00:34:37.070 t minus P sub w. 00:34:37.070 --> 00:34:40.980 So the government made the rectangle C. The government 00:34:40.980 --> 00:34:42.540 made C because we got to tax all the 00:34:42.540 --> 00:34:44.139 important at that tariff. 00:34:44.139 --> 00:34:49.820 So on net, society as a whole is worse off by B plus D. 00:34:49.820 --> 00:34:53.489 Consumers have lost the entire A plus B plus C plus D. 00:34:53.489 --> 00:34:54.650 Producers got some of that, the 00:34:54.650 --> 00:34:55.770 government got some of that. 00:34:55.770 --> 00:34:57.690 But some of it's dead weight loss. 00:34:57.690 --> 00:35:01.090 Trades that would have made consumers better off, and 00:35:01.090 --> 00:35:04.820 worldwide producers better off that are not happening. 00:35:04.820 --> 00:35:06.870 So this tariff, it had its effect. 00:35:06.870 --> 00:35:10.030 It lowered imports. 00:35:10.030 --> 00:35:14.880 But at the same time it lowered social surplus. 00:35:14.880 --> 00:35:21.460 So restrictions on trade lower welfare. 00:35:21.460 --> 00:35:24.065 And this is why economists like free trade. 00:35:24.065 --> 00:35:26.135 Because restrictions on trade lower welfare. 00:35:29.760 --> 00:35:33.000 Are there questions about that? 00:35:33.000 --> 00:35:37.300 Moreover, this is just what we call static analysis. 00:35:37.300 --> 00:35:41.930 What else could happen if the US government voted a tariff 00:35:41.930 --> 00:35:44.120 on roses coming from Colombia? 00:35:44.120 --> 00:35:45.324 What else might happen? 00:35:45.324 --> 00:35:46.540 Yeah? 00:35:46.540 --> 00:35:49.420 AUDIENCE: Colombia might vote for a tariff on the U.S. 00:35:49.420 --> 00:35:52.080 PROFESSOR: Columbia might vote for a tariff against computers 00:35:52.080 --> 00:35:53.910 coming from the US. 00:35:53.910 --> 00:35:57.320 Which of course would hurt Colombian consumers. 00:35:57.320 --> 00:36:00.140 But would also hurt US producers. 00:36:00.140 --> 00:36:04.180 So from the US's prospective, that would be even worse. 00:36:04.180 --> 00:36:05.660 So think about it-- 00:36:05.660 --> 00:36:08.250 we put a tariff on Colombian roses which hurt us. 00:36:08.250 --> 00:36:11.370 Then Colombia puts a tariffs on US computers which hurts us 00:36:11.370 --> 00:36:13.290 even further-- hurts Colombia too, but we don't care about 00:36:13.290 --> 00:36:15.040 them, we care about us. 00:36:15.040 --> 00:36:16.790 It hurts us even further. 00:36:16.790 --> 00:36:19.610 So dynamically restrictions on trade can be even worse than 00:36:19.610 --> 00:36:21.140 it looks in this diagram. 00:36:21.140 --> 00:36:25.120 If they cause a trade war you can actually end up with 00:36:25.120 --> 00:36:27.500 things being even worse than you look at this diagram. 00:36:27.500 --> 00:36:29.960 So we talked about why economists like free trade-- 00:36:29.960 --> 00:36:31.790 partly so that the gains to consumers exceed 00:36:31.790 --> 00:36:34.770 the losses to producers. 00:36:34.770 --> 00:36:39.400 But partly it's because free trade begets free trade. 00:36:39.400 --> 00:36:42.740 And that exports make us better off too. 00:36:42.740 --> 00:36:45.600 So by allowing free trade not only do we increase our 00:36:45.600 --> 00:36:48.530 welfare by having more imports, we also increased our 00:36:48.530 --> 00:36:49.890 welfare by allowing more exports. 00:36:49.890 --> 00:36:55.120 And in fact, producers as a class, if they could all get 00:36:55.120 --> 00:36:58.150 together and have a cooperative equilibrium, they 00:36:58.150 --> 00:37:00.090 might be fine without restrictions of trade. 00:37:00.090 --> 00:37:01.890 Because the computer producers and the rose producers get 00:37:01.890 --> 00:37:04.180 together and say, wait a second, we can trade, on net 00:37:04.180 --> 00:37:05.660 we win from this. 00:37:05.660 --> 00:37:06.750 On net we win from free trade. 00:37:06.750 --> 00:37:09.320 Let's get together and make a deal. 00:37:09.320 --> 00:37:11.290 But of course we know that's going to be an incredibly hard 00:37:11.290 --> 00:37:13.250 cooperative equilibrium to enforce. 00:37:13.250 --> 00:37:15.340 And that's why you have different sets of producers. 00:37:15.340 --> 00:37:17.610 You have the rose producers lobbying the congressmen. 00:37:17.610 --> 00:37:19.230 Then they leave and the computer producers walk in his 00:37:19.230 --> 00:37:21.890 office and lobby him the other way. 00:37:21.890 --> 00:37:24.760 So you have producers lobbying for different effects 00:37:24.760 --> 00:37:26.760 depending if they're competing with 00:37:26.760 --> 00:37:28.180 imports or they're exporting. 00:37:28.180 --> 00:37:29.935 They're going to lobby for and against trade restrictions. 00:37:33.570 --> 00:37:38.220 Moreover, there's yet another thing we've missed. 00:37:38.220 --> 00:37:39.800 There's yet another thing we've missed. 00:37:39.800 --> 00:37:42.720 So we've talked about the dead weight loss. 00:37:42.720 --> 00:37:44.150 We've talked about trade wars. 00:37:44.150 --> 00:37:45.730 But let's say for a second-- let's think 00:37:45.730 --> 00:37:46.230 about a third thing. 00:37:46.230 --> 00:37:47.380 Let's say for a second we're not just 00:37:47.380 --> 00:37:48.510 heartless selfish Americans. 00:37:48.510 --> 00:37:51.180 But we actually do care about the rest of the world. 00:37:51.180 --> 00:37:53.680 Well the third thing we miss is allowing trade from 00:37:53.680 --> 00:37:56.270 Colombia makes Colombia better off too. 00:37:58.910 --> 00:38:01.850 So not only have we improved our welfare by importing 00:38:01.850 --> 00:38:04.750 Colombian roses, we've improved their welfare too. 00:38:04.750 --> 00:38:05.960 And they're a poor country. 00:38:05.960 --> 00:38:08.660 And we should be happy to improve their welfare too. 00:38:08.660 --> 00:38:10.420 We think about free trade in Vietnam. 00:38:10.420 --> 00:38:12.620 That is the application for child labor. 00:38:12.620 --> 00:38:15.360 By allowing the import of Vietnamese rice we improved 00:38:15.360 --> 00:38:18.390 the lives of the Vietnamese children. 00:38:18.390 --> 00:38:20.585 So independent of the fact we've made our lives better 00:38:20.585 --> 00:38:21.650 off we've made these other country's 00:38:21.650 --> 00:38:23.780 lives better off too. 00:38:23.780 --> 00:38:26.270 So there's three reasons why we should have free trade. 00:38:26.270 --> 00:38:28.610 There's the simple welfare gain, there's the dynamic 00:38:28.610 --> 00:38:30.920 welfare gain, and there's the fact that we might care about 00:38:30.920 --> 00:38:32.440 the welfare of other countries as well. 00:38:35.140 --> 00:38:39.200 And as a result, there's been a huge emphasis over time in 00:38:39.200 --> 00:38:43.550 trying to increase free trade. 00:38:43.550 --> 00:38:45.690 By economists saying this for years, things going back to 00:38:45.690 --> 00:38:46.990 the early economists. 00:38:46.990 --> 00:38:50.520 But we've made a lot of headway in the last 20 years. 00:38:50.520 --> 00:38:53.810 And in particular, one big source of headway was NAFTA-- 00:38:56.430 --> 00:38:58.790 The North American Free Trade Agreement. 00:38:58.790 --> 00:39:00.520 Which was passed under Clinton. 00:39:00.520 --> 00:39:04.680 Which basically demolished trade barriers between Canada 00:39:04.680 --> 00:39:06.720 the US and Mexico. 00:39:06.720 --> 00:39:08.050 There used to be a lot of trade barriers. 00:39:08.050 --> 00:39:10.200 We would tax Canadian lumber. 00:39:10.200 --> 00:39:11.950 They would tax our computers. 00:39:11.950 --> 00:39:15.620 We would tax Mexican whatever they sent to us. 00:39:15.620 --> 00:39:17.020 They would tax our stuff. 00:39:17.020 --> 00:39:17.880 It was a mess. 00:39:17.880 --> 00:39:21.450 So basically NAFTA said let's just get rid of all of it. 00:39:21.450 --> 00:39:25.170 Let's have a cooperative agreement. 00:39:25.170 --> 00:39:29.800 Let's have a cooperative agreement whereby we all agree 00:39:29.800 --> 00:39:31.570 to get rid of trade barriers and thereby making all of us 00:39:31.570 --> 00:39:33.500 better off. 00:39:33.500 --> 00:39:35.590 And it seems like it would be a pretty simple thing to do. 00:39:35.590 --> 00:39:36.970 But it was a mess. 00:39:36.970 --> 00:39:38.370 And it was very hard. 00:39:38.370 --> 00:39:42.270 And it was very hard because now you had parties in every 00:39:42.270 --> 00:39:44.630 country opposing this. 00:39:44.630 --> 00:39:46.660 You had you had the Canadian computer 00:39:46.660 --> 00:39:48.250 producers getting upset. 00:39:48.250 --> 00:39:50.340 You had the Mexican computer producers getting upset. 00:39:50.340 --> 00:39:53.160 You had the US lumber industry getting upset. 00:39:53.160 --> 00:39:58.030 And you had huge difficulties because you had parties in 00:39:58.030 --> 00:40:00.950 every case opposing it. 00:40:00.950 --> 00:40:03.560 And the reason free trade agreements are so difficult-- 00:40:03.560 --> 00:40:05.020 now eventually NAFTA did pass. 00:40:05.020 --> 00:40:10.890 And has been by most measures a huge success. 00:40:10.890 --> 00:40:14.830 But ultimately the major difficulty here is in another 00:40:14.830 --> 00:40:17.150 failure of government policy. 00:40:17.150 --> 00:40:20.680 Which is the inability of the government to effectively tax 00:40:20.680 --> 00:40:22.840 the winners and compensate the losers from 00:40:22.840 --> 00:40:25.260 international trade. 00:40:25.260 --> 00:40:26.550 That is-- 00:40:26.550 --> 00:40:29.570 if the government could work as a perfect-- 00:40:29.570 --> 00:40:31.310 in the way that I design it to work-- 00:40:31.310 --> 00:40:35.720 what would happen is that we would tax sweatshirts and take 00:40:35.720 --> 00:40:38.350 the money from taxing sweatshirts and send it to 00:40:38.350 --> 00:40:42.970 compensate the guys who lost jobs in the textile industry. 00:40:42.970 --> 00:40:47.430 And if we did that, we can make life much better off than 00:40:47.430 --> 00:40:47.920 with the tariff. 00:40:47.920 --> 00:40:48.710 So if consider two outcomes. 00:40:48.710 --> 00:40:52.300 One is we don't import Chinese sweatshirts. 00:40:52.300 --> 00:40:54.420 The other is that we import them but we levy a small tax 00:40:54.420 --> 00:40:59.200 on all sweatshirts not just Chinese lectures. 00:40:59.200 --> 00:41:01.180 Levy a small tax on all sweatshirts. 00:41:01.180 --> 00:41:03.270 We import Chinese sweatshirts but then we levy a tax on all 00:41:03.270 --> 00:41:04.360 sweatshirts. 00:41:04.360 --> 00:41:06.770 And we use that sweatshirt tax money to pay off the guys who 00:41:06.770 --> 00:41:08.940 lost their jobs in the textile industry. 00:41:08.940 --> 00:41:12.370 That would be better for society than would not allow 00:41:12.370 --> 00:41:15.150 sweatshirts to come in in the first place. 00:41:15.150 --> 00:41:18.200 So the fundamental failure in trade policy ultimately is a 00:41:18.200 --> 00:41:20.850 failure is that inability of the government to effectively 00:41:20.850 --> 00:41:23.990 compensate the losers by taxing the winners. 00:41:23.990 --> 00:41:28.620 Because just as the losers know to go to lobby Congress, 00:41:28.620 --> 00:41:30.780 the winners will get pissed off if you start taxing 00:41:30.780 --> 00:41:31.570 sweatshirts. 00:41:31.570 --> 00:41:33.210 Because they don't realize that they're saving all this 00:41:33.210 --> 00:41:36.735 money from all these imports. 00:41:36.735 --> 00:41:38.625 And in fact the typical American voter would probably 00:41:38.625 --> 00:41:41.430 vote to block Chinese imports before they'd vote to have a 00:41:41.430 --> 00:41:43.940 tax on their sweatshirts. 00:41:43.940 --> 00:41:47.630 So really in some sense when you have a very concentrated 00:41:47.630 --> 00:41:51.390 set of winners or losers competing against a very 00:41:51.390 --> 00:41:53.610 concentrated set of losers, defeating against a very 00:41:53.610 --> 00:41:59.250 diffuse set of winners, that's a hard policy to get in place. 00:41:59.250 --> 00:42:01.890 Unless you can figure out a way to get those winners to 00:42:01.890 --> 00:42:03.630 compensate the losers. 00:42:03.630 --> 00:42:06.040 And that's the tricky thing. 00:42:10.300 --> 00:42:11.770 Are there question about that? 00:42:11.770 --> 00:42:15.920 About free trade agreements, things like that? 00:42:15.920 --> 00:42:23.360 Now what I want to talk about for a couple minutes then one 00:42:23.360 --> 00:42:25.400 subtlety in these free trade agreements. 00:42:25.400 --> 00:42:27.970 And why things like NAFTA are hard. 00:42:27.970 --> 00:42:30.950 And the reason they're hard is because this 00:42:30.950 --> 00:42:32.940 makes enormous sense. 00:42:32.940 --> 00:42:35.790 Free trade agreements make enormous sense if it's true 00:42:35.790 --> 00:42:38.720 comparative advantage like Canada has more trees. 00:42:38.720 --> 00:42:40.850 But what if Mexico's source of comparative advantage is that 00:42:40.850 --> 00:42:43.100 they treat their workers like shit. 00:42:43.100 --> 00:42:45.590 What if China's source of comparative advantage is that 00:42:45.590 --> 00:42:47.940 they have incredibly bad working conditions? 00:42:47.940 --> 00:42:50.860 And they have incredibly bad environmental conditions? 00:42:50.860 --> 00:42:54.610 China has an incredibly bad environmental situation. 00:42:54.610 --> 00:42:56.260 It is incredibly dangerous just to live in 00:42:56.260 --> 00:42:58.480 major Chinese cities. 00:42:58.480 --> 00:43:00.250 The working conditions are awful. 00:43:00.250 --> 00:43:02.690 The wages are terrible. 00:43:02.690 --> 00:43:06.340 Nonetheless, the result is very, very cheap labor. 00:43:06.340 --> 00:43:09.210 Then things get a little dicier. 00:43:09.210 --> 00:43:12.140 Because if the Chinese labor was cheap or Mexican labor was 00:43:12.140 --> 00:43:14.140 cheap just because inherently that was just 00:43:14.140 --> 00:43:15.520 the way life was. 00:43:15.520 --> 00:43:17.480 At the same working conditions and the same environmental 00:43:17.480 --> 00:43:19.430 conditions they were just cheaper, then that's great. 00:43:19.430 --> 00:43:21.110 That's the comparative advantage. 00:43:21.110 --> 00:43:24.140 But if they're cheap because they exploit their population 00:43:24.140 --> 00:43:26.030 and put them in horrible working conditions and facing 00:43:26.030 --> 00:43:28.500 horrible environmental conditions, then the welfare 00:43:28.500 --> 00:43:29.720 gets a little trickier. 00:43:29.720 --> 00:43:32.400 From the US's prospective it doesn't get any trickier. 00:43:32.400 --> 00:43:33.630 The US-- 00:43:33.630 --> 00:43:35.640 our welfare is exactly the same. 00:43:35.640 --> 00:43:38.840 We get these static and dynamic gains from trade. 00:43:38.840 --> 00:43:42.630 But from a world perspective, now we're maybe not so sure we 00:43:42.630 --> 00:43:45.320 want to promote Mexico producing more clothes or 00:43:45.320 --> 00:43:46.790 China producing more clothes. 00:43:46.790 --> 00:43:49.130 Because it could just lead to more exploitation of the 00:43:49.130 --> 00:43:51.430 population. 00:43:51.430 --> 00:43:53.970 So this comes back to when I talked about free trade in 00:43:53.970 --> 00:43:55.880 Vietnam and child labor. 00:43:55.880 --> 00:43:58.850 Which is if free trade actually let to an increased 00:43:58.850 --> 00:44:02.120 use of child labor in Vietnam we might worry that gee maybe 00:44:02.120 --> 00:44:04.570 this isn't such a good thing. 00:44:04.570 --> 00:44:06.790 So really what it comes down to is we have to think not 00:44:06.790 --> 00:44:09.930 just about the simple dead weight loss 00:44:09.930 --> 00:44:11.480 triangles and squares. 00:44:11.480 --> 00:44:13.950 We have to think about some broader social issues as well. 00:44:13.950 --> 00:44:15.630 And once again there is a right answer here. 00:44:15.630 --> 00:44:17.790 And this is what a lot was fought over with NAFTA. 00:44:17.790 --> 00:44:21.440 Which is one of the conditions for NAFTA was the US actually 00:44:21.440 --> 00:44:23.920 lobbied and got significantly improved work and 00:44:23.920 --> 00:44:26.240 environmental standards in Mexico. 00:44:26.240 --> 00:44:28.430 This was like an opposite of a trade war. 00:44:28.430 --> 00:44:30.230 Instead of being a vicious cycle, this 00:44:30.230 --> 00:44:31.550 was a virtuous cycle. 00:44:31.550 --> 00:44:34.870 We actually improved the life for workers in Mexico because 00:44:34.870 --> 00:44:38.300 Mexico is willing to do that in order to get the benefits 00:44:38.300 --> 00:44:40.170 of trade with the US. 00:44:40.170 --> 00:44:46.940 So just like limiting trade with Mexico will hurt us and 00:44:46.940 --> 00:44:51.280 hurt Mexico, expanding trade with Mexico and then tying it 00:44:51.280 --> 00:44:54.050 to improve work conditions and environmental conditions can 00:44:54.050 --> 00:44:56.790 make both countries really much better off. 00:44:56.790 --> 00:44:59.150 And so that's where, once again, trade becomes very 00:44:59.150 --> 00:44:59.590 interesting. 00:44:59.590 --> 00:45:01.180 And why it's worth studying further. 00:45:01.180 --> 00:45:03.730 Because it's not as simple as these boxes. 00:45:03.730 --> 00:45:05.220 It's thinking about where comparative 00:45:05.220 --> 00:45:06.540 advantage comes from. 00:45:06.540 --> 00:45:08.770 And whether we really want to promote trade with countries 00:45:08.770 --> 00:45:10.570 that have comparative advantage depending on the 00:45:10.570 --> 00:45:12.820 source of what that comparative advantage is. 00:45:12.820 --> 00:45:13.650 And that's sort of the free trade 00:45:13.650 --> 00:45:15.280 versus fair trade argument. 00:45:15.280 --> 00:45:16.590 The bottom line in that argument-- 00:45:16.590 --> 00:45:18.530 the free trade versus fair trade argument-- the bottom 00:45:18.530 --> 00:45:22.390 line is free trade is always a good thing. 00:45:22.390 --> 00:45:26.170 But fair trade considerations can be used to try to make it 00:45:26.170 --> 00:45:31.060 work better than just simply unfettered free trade. 00:45:31.060 --> 00:45:33.730 And so really both sides have a point in this debate. 00:45:33.730 --> 00:45:37.200 So let me stop there. 00:45:37.200 --> 00:45:37.720 That's international trade. 00:45:37.720 --> 00:45:39.890 We're going to come back on Wednesday to talk about 00:45:39.890 --> 00:45:41.240 uncertainty and whether you should play the lottery.