hi I'm Adriene Hill and I'm mr. Clifford
and welcome to crash course economics
here at crash course we recognize that
difficult subjects are sometimes taught
with truly unintelligible vocabulary
that's difficult for us regular people
to understand but it doesn't have to be
that complicated
remember economics is the study of
scarcity and choices we have limited
resources so we need a way to analyze
the best way to use them we need
economics to make wise decisions in the
future but also helps us understand the
past most empires Wars and human
endeavors can be explained using
economics I have to understand is who
wanted what the American Civil War
wasn't just about freedom it was fought
because southern states wanted to keep
using cheap slave labor
it was economics you can't explain so
much about the world that's what we love
teaching it and that's what makes it the
greatest subject of all time think that
physics we're coming for you
let's stick with his history theme and
talk about the progress of humanity
throughout the ages using measurements
like life expectancy child mortality and
income per capita we can show the
majority of humans that ever lived had
terrible lives statistically speaking it
wasn't until the Industrial Revolution
that people saw significant and
sustained increase in their standard of
living population skyrocketed but so did
life expectancy and food supplies and
hospitals and eventually toilets and
refrigerators it was in the beginning of
the Industrial Revolution that Adam
Smith the first modern economist wrote
his book and inquiry into the nature and
causes of the wealth of nations or antic
Huntoon : he wasn't great at naming
books but he was really good to explain
the source of prosperity Smith concluded
that it was specialization what he
called the division of labor to make
countries wealthy let's go to the
thought-bubble when I think of
specialization I think of a pizza
restaurant where different workers have
specific tasks like preparing the
ingredients making the pizza putting it
in the oven taking it out and putting it
in the box this division of labor makes
each worker more productive since they
can each focus on the thing they do best
and they don't waste time switching
between jobs but specialization goes
beyond the assembly line for pizza to
produce the cheese there was a dairy
farmer who specialized in raising cows
the oven was designed and manufactured
by people who specialized in engineering
ovens the friendly mustache guy in the
pizza box
someone had to stamp them on there I
love that guy Adam Smith observed in
every improved Society the farmer is
generally nothing but a farmer the
manufacturer nothing but a manufacturer
the labor necessary to produce any one
complete manufacturer is almost always
divided among a great number of hands
imagine what it would be like to make a
pizza completely on your own from
scratch you would have to grow the wheat
and tomatoes and raise the cow you would
make the flour the cheese the oven the
pan and then draw the mustache guy in
the box without specialization if you
want something you have to make it
yourself and for thousands of years of
human history specialization was well
pretty minimal of course humans
specialized prior to the Industrial
Revolution it's one of the marks of
civilization that we mentioned in our
world history series but the modern era
has taken this to the extreme think of
how many people from how many different
specialized fields it takes to make a
smart phone all of them working in
harmony so I can tweet my super profound
thought thanks thought-bubble
so specialization makes people more
productive but Adam Smith said that it's
trade that makes them better off assume
that John can produce either pizza or
t-shirts if he's way better at producing
pizza then he should specialize in
making pizza and then trade with someone
else like Hank who's way better at
making t-shirts
everyone knows Hanks better at making
t-shirts right what trade each of them
can end up with more pizza and shirts
than if they tried to make them on their
own to fully explain this idea of the
benefits of trade we need to show you an
economic model but before we go any
further know that economists geeked out
over models and graphs don't get all
worked up about the numbers they're not
that complicated models are just visuals
to help us simplify and explain concepts
it's time for the model so let's go to
the runway now this is the first graph
you'll see in an economics textbook it's
called the production possibilities
frontier or PPF the PPF shows the
different combinations of two goods
being produced using all resources
efficiently now here's the made-up
example if the United States uses all of
its workers and factories to produce
airplanes it can produce 500 per day but
it can't produce any shoes now if they
use all their resources to produce shoes
they can produce a thousand tons per day
but they can't produce any planes now
because the United States has limited
resources they can't produce any
combination beyond the production
possibilities frontier so it's
impossible to produce 500 planes and a
thousand tons of shoes wait wait wait
mr. Clifford I want to stop you here for
a second we don't live in a world where
there are only two things that a country
can produce there are like a million
things that US workers can choose to
make toilet paper zippers adorable stuff
kitty cats holding heart artisanal
sauerkraut we don't live in a world of
just shoes and airplanes so what's the
real world value of the production
possibilities frontier the idea is once
you really understand that there's
trade-offs between producing two goods
that same logic applies to any number of
goods and adding additional goods makes
it more complex but doesn't really add
any more insights so economists usually
stick with just too good now what if the
American companies mismanaged their
resources and tried to produce planes
and shoe factories and shoes and plane
factories
well they'd be at a point inside the
production possibilities frontier
showing an inefficient use of resources
so every possible combination inside the
curve is inefficient and on the curve is
efficient and outside the curve is
impossible now let's compare this PPF to
china's china can produce 100 planes per
day or 800 tonnes of shoes since the
united states can produce more planes
than china they have an absolute
advantage in the production of planes
the u.s. also has an absolute advantage
in the production of shoes since the
u.s. can produce more of both goods you
might think there's no reason to trade
but they should just produce both on
their own well know remember
specialization and trade makes people
and in this case country is better off
now stick with me let's calculate the
opportunity cost of the United States
produce one plane every single time they
produce an additional plane it cost them
two tons of shoes China on the other
hand gives up eight tons of shoes for
each plane they produce and since the US
has a lower opportunity cost they have
what's called a comparative advantage
China has a comparative advantage in the
production of shoes but here's the best
part if the US specializes in planes
they can import shoes from China at a
lower opportunity cost than if they
produce shoes themselves for example if
these two countries make a deal to trade
one plane for four tons of shoes the US
would be better off they would rather
get four tons of shoes per plane from
China then only get two tons of shoes
per plane by making shoes on their own
now China is also better off they would
rather trade for tons of shoes for a
plane then give up eight tons of shoes
for producing a plane on their own now
hopefully your head isn't spinning being
able to do these calculations is good
but more important understand the main
idea individuals and countries should
specialize in producing things in which
they have a comparative advantage and
then trade with other countries that
specialize in something else this trade
is mutually beneficial now that's the
production possibilities frontier in the
real world it's way more complicated in
the simplified model and we're only in
the beginning so this graph is super
simplified but the idea that countries
should focus on producing the products
for which they are better suited is huge
way huge in reality the u.s. is the
world's leading manufacturer and
exporter of airplanes it produces more
than 40% of all planes at the same time
the u.s. produces less than 2 percent of
the world shoes electing instead to
import them from countries in Asia the
graphs aren't real but the concepts are
another reason you should learn this is
because you might hear a politician or
someone on the news argue that
international trade destroys domestic
jobs and even though it may seem
counterintuitive economists for
centuries have argued that trade is
mutually beneficial to whoever's trading
now you know what
be fair there are all sorts of other
intolerable issues associated with
international trade like child labor
dangerous working conditions and
pollution and we promised to address
these in a future video but if there's
one point on which most economists agree
it's that specialization in trade makes
the world better off no country in
recent decades has achieved sustained
improvements in living standards without
open trade with the rest of the world
countries like Cuba Venezuela Zimbabwe
and Iran that are voluntarily or
involuntarily cut off from the world
remain less economically developed than
they could be on the other hand
countries that have opened their doors
to trade like Japan and Taiwan or more
recently China and India have seen
massive improvements in their standards
of living Adam Smith was on to something
self-sufficiency is in efficiency in
inefficiency can lead to poverty
next time we'll show you how some of
these ideas get turned into economic
systems and how these systems contribute
to the differences between countries
thanks so much for watching we'll see
you next week
crash course is made with the help of
all these nice people who have explored
the far reaches of the production
possibilities frontier to bring you this
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to be irrationally exuberant