Specialization and Trade: Crash Course Economics #2

Specialization and Trade: Crash Course Economics #2


Adriene Hill: Hi I’m Adriene Hill.
Mr. Clifford: And I’m Mr. Clifford. Welcome to Crash Course Economics. Adriene: Here at Crash Course, we recognize
that difficult subjects are sometimes fraught with truly unintelligible vocabulary that’s
difficult for us regular people to understand. Mr. Clifford: 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 it also helps us understand the past. Adriene: Most empires, wars, and human endeavors
can be explained using economics. All you 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. Mr. Clifford: Econ can explain so much about
the world, and that’s why we love teaching it, and that’s what makes it the greatest
subjects of all time. Adriene: Take that physics! We’re comin’ for
ya! [Theme Music] Adriene: Let’s stick with this 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. Populations
skyrocketed, but so did life expectancy and food supplies and hospitals and eventually
toilets and refrigerators. Mr. Clifford: It was at the beginning of the
industrial revolution that Adam Smith, the first modern economist, wrote his book An
Inquiry Into the Nature and Causes of the Wealth of Nations or AIITNACOTWON. He wasn’t
great at naming books, but he was really good at explaining the source of prosperity. Smith
concluded it was specialization, or what he called the division of labor, that made countries
wealthy. Let’s go to the Thought Bubble. Adriene: 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 specialize in engineering ovens;
the friendly moustache guy on the pizza box? Someone had to stamp him 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 labour… necessary to produce any one complete manufacture, 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’d make the flour, the cheese, the oven, the pan, and then draw the
moustache guy on 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 smartphone, all of them working
in harmony so I can tweet my super profound thoughts. 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 making
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 Hank’s better at making t-shirts,
right? With 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 geek 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. Mr. Clifford: 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 a made up example. If the United
States uses all of its workers and factories to produce airplanes, it can produce 500 per
day, but they can’t produce any shoes. Now if they use all their resources to produce
shoes, they can produce 1000 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 1000 tons of shoes. Adriene: 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 stuffed kitty cats holding hearts, 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? Mr. Clifford: The idea is once you really
understand that there’s trade-offs between producing two goods, that same logic applies
for any number of goods. Adding additional goods makes it more complex but doesn’t really
add any more insights, so economists usually just stick with two goods. Now, what if American companies mismanage
their resources and try to produce planes in shoe factories and shoes in 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 tons of shoes. Since the United States can produce
more planes than China, they have an absolute advantage in the production of planes. The US also
has an absolute advantage in the production of shoes. Since the US can produce more of both goods,
you might think there’s no reason to trade, that they should just produce both on their
own. Well, no. Remember, specialization and trade makes people, and in this case countries,
better off. Now stick with me, let’s calculate the opportunity
cost for the United States to produce one plane. Every single time they produce an additional
plane, it costs them two tons of shoes. China on the other hand gives up 8 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 than only get two tons per plane by making shoes on their own. Now, China
is also better off. They would rather trade four tons of shoes for a plane than give up
8 tons for producing a plane on their own. Now hopefully your head isn’t spinning. Being
able to do these calculations is good, but it’s more important to understand the main
idea. Individual 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 than this simplified model, and we’re only
in the beginning. Adriene: 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 US is the world’s leading
manufacturer and exporter of airplanes. It produces more than 40% of all planes. At the
same time, the US produces less than 2% of the world’s 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 why. Now to be fair, there are all sorts of other
intolerable issues associated with international trade, like child labor, dangerous working
conditions and pollution, and we promise to address these in a future video. But if there’s
one point on which most economists agree, it’s that specialization and 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. Mr. Clifford: Adam Smith was on to something.
Self-sufficiency is inefficiency and inefficiency can lead to poverty. Adriene: 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’ve explored the far reaches of the production possibilities frontier
to bring you this show. If you want to keep Crash Course for everyone forever, please
consider subscribing over at Patreon. Patreon is a voluntary subscription service that allows
you to pay whatever you want monthly and make Crash Course exist. Thanks for watching. Don’t
forget to be irrationally exuberant.

100 Comments

  1. Mr Sandman says:

    Why is this guy talking so fast? Is anybody chasing him? 😀 😀

  2. AJ Freeney says:

    I'm not sure the graph analysis was correct. They said that every plane America made was substituting a number of shoes but the amount of shoes being substituted is different depending on where you are on the curve

  3. Jeffrey Ock says:

    I see that ACDC belt

  4. Hazim Rahim says:

    he changed his belt

  5. CJ Macbeth says:

    So you had a line saying "the friendly mustache guy on the pizza box…" and you didn't put the pizza john face on it? …?????

  6. KENNETH FOSTER says:

    I majored in Econ in college and I love the topic, but I have to echo that the hosts annoy me. I know it's not just the people, because Adrienne's series on Stats is music to my ears. Maybe the producer kept telling them they need to be sillier?

  7. Harper Grace says:

    Concepts in this lesson: for me or whoever wants it lol
    (ib someone in the top comments)
    1. ADAM SMITH- specialization made countries wealthy aka the division of labor
    +
    What is specialization- the process of concentrating on and becoming expert in a particular subject or skill
    so basically everyone has there own jobs to complete to get the job done faster. (assembly line type situation)
    makes people more productive
    +
    Benefits of Trade-
    model PPF Production Possibility Frontier – shows the different combinations of 2 goods being produced using all resources efficiently
    r e a l w o r l d i d e a – to understand that there's trade offs between producing 2 or more goods.
    absolute advantage- the ability to produce more of one good
    % still need trade % jacob speaks too fast for my tiny brain ^I''m 1/2 way through my economics course and am trying to understand things fully up to where im at anyways rip^
    +
    Countries with lower opportunity cost for producing the good have the "comparative advantage"
    For the us for each additional good they produce they lose 2 of another.
    cHinA hAs a LoWer "opportunity cost" for shoes meaning they have the "comparative advantage".
    COUNTRIES WANT LOWEST OPPORTUNITY COST
    g o o d l u c k w i t h y o u r e c o n o m i c s c o u r s e
    let me get a rip in the chat okay bye

  8. Vinny Tricarico says:

    I only get my economic education from someone wearing an AC/DC belt!

  9. Rumpel JA says:

    I thought being self sufficient was supposed to be a good thing.

  10. Tommy Cachimuel says:

    So when will I learn to do my taxes?

  11. Dkaloger says:

    One word comparative advantage

  12. klose king says:

    ok let's be honest here maths is greatest subject

  13. Hermione Granger says:

    Everybody subscribe to Jacob Clifford to save your grade ❤❤❤

  14. flexible riyah says:

    Cuba is well off we dont need other countries

  15. Malacki 655 says:

    Free trade is the key to development

  16. Sophia Cai says:

    sees "individuals and countries"
    Wait aren't those the same thing?
    Oh right I'm not watching Hetalia anymore. Oops.

  17. Santi Pasa says:

    Shoes, planes… got lost

  18. mingyu zhang says:

    I am sorry ,on offense,i am a Chinese and I really like this course but when I lessened Taiwan is a country I can't make sense with you。but it's not you do something wrong just you don't see that history

  19. Horton El Troll says:

    There is a myth that is was southern states that wanted slaves. It was actually the Democrat party that wanted slavery and they weren't just from the south.

  20. Adrian Besana says:

    take that physics! were coming for yah! HHAHAHHAHA

  21. Mathieu Nault-Maloney says:

    I had no clue economics was so interesting

  22. Vishwas Bharadwaj says:

    Good veido man.

  23. Roku Bengia says:

    Thanks Crash course

  24. Whuzzin Gamont says:

    Watch at 1.5x speed

  25. Joshua Adams says:

  26. Peter Tailor says:

    kazoowoman

  27. Aryan Hegde says:

    Why's the script so childish can we have john write it instead

  28. Zeeshan Khokhar says:

    You guys are helping me soo much. I get energy watching you guys excited to teach me. I love you both & team. God bless you. Love from Pakistan ??

  29. Joceephus Of Maynard says:

    Fun Fact: China only buys American planes so they can steal the technology and make it themselves

  30. leah morrow says:

    All the videos I have watched all I have to say is SLOW DOWN when you speak. You guys speak crazy fast. Slow down and clearly get your point across.

  31. Zac Douglas says:

    0:03 I confirm your suggestion that complex fields of research are often expressed with a hypercomplex vocabulary.

  32. zariyah allen says:

    china actually has the advantage on the u.s  just saying

  33. Jacket says:

    anyone else's teacher not actually teaching and making you watch this instead?

  34. Acer says:

    Great job on explaining the concepts.  Taking an online course, this is a great supplement to clarify much of the reading involved.

  35. Martin Benek says:

    Is that Marx behind you?

  36. Monika Jangid says:

    Just wow

  37. Thea Yu says:

    Taiwan is not a country.

  38. Marhanda Rivera says:

    Can someone sum this whole video up for me please, I'm having a hard time understanding

  39. Caie Patches says:

    Can you recommend a high school economics course?

  40. Ariel Currá says:

    This is a great course

  41. 洪玮 says:

    hey, at 7:54 , Taiwan is not a country

  42. Suen G says:

    Taiwan is a place in China

  43. Will Burns says:

    That ACDC belt

  44. Rosamund T says:

    wow they talk really fast!

  45. Flavia Lobato says:

    I would love a crash course on accounting

  46. Actually_ says:

    Why is Karl Marx in the background?

  47. vanillaglue says:

    False. The civil war was over who would control the usd

  48. Apriafel Gilang BP says:

    Yes i anderstand thank you, specialy indonesia subtitle

  49. smileyface702 says:

    You talk about how industrialization makes quality of life better – tell that to the labourers working 14 hour days, 7 days a week in factories…

  50. Valkyrie Industrial says:

    Over specialization can make you over dependent on a single source.

  51. Ravi Raj says:

    That means we indians knew the concept of specialisation way back as we had varna system in our society!!! ??

  52. Rifky S'deen says:

    watching this while eating pizza!

  53. Vitusa TV says:

    You are the best!

  54. YaShanda Skinner says:

    You mean Free slave labor!

  55. Mireya Jarick says:

    why is he wearing an acdc belt?

  56. Koen Leekens says:

    Would it be more fun to make a complete pizza or non-stop – 8 hour per day put cheese?

  57. Larissa Parmagnani says:

    Physics >> Econimics

    Sorry.

  58. Noah Kistler says:

    ok

  59. Hayden Rex says:

    hi

  60. Tegne Guri says:

    As a woman I have been avoiding economics, math and science like the plague thinking I was too stupid for it. Until I read that these subjects were actually viewed as simple when the first university in my country opened. When women first were allowed to study, math and science were some of the few subjects seen as fitting to their "simple" minds. This was because the "powerful" subjects were theology, philosophy, law and medicine, and were seen as unfitting to women. Now that science has the upper hand, we women are again made to feel too stupid for it. Funny how we’re always made to feel too stupid for power. I WILL STUDY ECONOMICS THIS FALL

  61. Dutchess and Kay says:

    So that explains why we get stuff made in China =)
    It's obviously not their quality, but their quantity and so we have that advantage.. interesting.

    This is just a tiny detail I got from the video I think, I'm glad I understand quite a bit of it now I think. Even the word "economics" sounds like a very complicated word that alone sounds like something that is going to be complex, dull, and boring to explain. I'm happy that there is content out there that turns something so tedious and boring into something truly fascinating, and turns the dull subject into making it seem more of an artistic subject and creative yet very logical and highly convenient and again, "fascinating"! =D

  62. **Channel innactive** SortOf says:

    you're talking too fast my brain cant even compress the idea of one sentence while trying to catch up on your next sentence then everything falls apart…

  63. Lee Randall says:

    I came to crashcourse from watching Mr. Clifford's videos and was really confused to see him again.

  64. Frosty says:

    "Hey fellow kids"

  65. Abderrahim Abdellaoui says:

    شكرا جزيلا لكم!
    مجهود كبير وبرنامج تحفة فنية.

  66. JIN-A RIN says:

    Yo I got a test tomorrow and this is helping a lot more 🙂

  67. Huan Le says:

    1:40 John Green has mad Pizza flipping skill confirmed !

  68. Rushikesh Kavar says:

    What a great great explaination of concepts and love you lady

  69. Zain Peace says:

    Sorry but you translated something wrong into arabic 6:18
    فتفضل مقايضة "أربعة" أطنان من الأحذية
    Not ثمانية أطنان

  70. paolo zafra says:

    I love economics, but physics is still the BEST

  71. RUGER 14 says:

    Doesn't mention how chinese goods are inferior yet you'll pay the same price as if it had been produced with high-grade materials.

  72. Rick Salani says:

    Great video but what’s the rush? It’d be great if you could slow down. It’s overwhelming to hear the hosts speak so quickly

  73. Der Videomander says:

    Self-sufficiency isn't necessarily inefficient, it's ineffective!

  74. obidi anudokem says:

    I am a little confusing.

  75. Ty McLeod says:

    So let me get this straight.

    The fastest Nation to establish the most sentient AI will automatically win (due to the operating ability to process every possible economic shift ever, prioritizing best outcome in response to any other human developed graph) and break this entire global equation (Operating Macro-Economics) and shift the world powers one last time permanently is what we have to worry about now?

    That's the fascination with AI isn't It? All makes sense now If you think about it in this context.

  76. B R A I N. C E L L S says:

    who else didn't know what Sauerkraut was until this video?

    Who else always stops the video to read the facts at the beginning of the intro?

  77. Boy to Man says:

    0:35 wrongo! The war wasnt between the north and south. It was the freedom loving liberal republicans vs the slave owning democrats. The year before the civil war, no republican owned a slave. All slaves were owned by democrats north and south. Liberalism is still a republican value but the word was hijacked by the left in the 20th century. But only in america. In europe, liberalism still means free to be you and me.

  78. Nusaibah Ibraheem says:

    Standard of living is higher for countries that trade but when push come to shove, countries with various specialization will probably do better in an "apocalyptic situation" or just WAR. Also no one can bully these countries. They are actually truly free, may be not rich, but free.

  79. theicyridge says:

    Trade and corporate outsourcing are very different things.

  80. Guy Reshef says:

    07:05 one year later that's exactly what TRUMP said.

  81. Kshitiz Sharma says:

    2:40 you forgot to mention that we must first invent the universe

  82. Aakanksha Chandra says:

    They should mention that David Ricardo brought in the theory of Comparative Advantage whereas Adam Smith only talked about Absolute Advantage. The video could be factually misleading for someone who doesn't know what Adam Smith talked about. The difference is huge in International Economics.

  83. Mireille Lebeau says:

    "you might hear a politician argue that international trade destroys domestic jobs, and even though it may seems counterintuitive …economists have argue that trade is mutually beneficial to whoever's trading." vs Trump's tariffs 2018-19

  84. Salvador Johnson says:

    could someone explain why at 6:00, he says that china has a comparative advantage on shoes

  85. Kyle Baggett says:

    Slave labor…. And corporate slavery…. I don't see much of a difference

  86. Ton Nugent says:

    Thanks for the great lesson.

  87. Dhimmzzz T.B says:

    Self sufficiency is indeed less efficient and quality than specialized ones,but,at least people lesd depends on money by self sufficiency.

  88. Gaming Seriously says:

    physics:"how dare you challenge me?!!!"

  89. Hanyu Li says:

    I used that same child labour photo in my 5th grade exhibition lol

  90. jeric cordero says:

    Hello nice video and channel very informative can you add subtitle for filipino tagalog i will subscribe thanks

  91. Valerie Shinn says:

    Lol that's why I study both physics and economics. Couldn't decide

  92. Qurban Ali says:

    Iran, Venezuela and cuba are not voluntarily cut off, it's because of impartialist USA imposed trade sanctions on them! Secondly could you answer why Russia developed so much after revolution,? certainly reason is not open market!

  93. Maحreen Azam says:

    The Audio isn't good!
    Feels like my friend is explaining things to me right the min bfr exam, why are you guys speaking extra fast. I feel irritated just after watching the video for 1 minute… :/

  94. Daisy Felicity says:

    Taiwan is not a country

  95. Jaccobtw says:

    At 6:12:

    Why not trade 1 plane for 7 tons of shoes. That’s still a good deal for China and you get more shoes.

  96. Crimson_Pants says:

    Mr. C give me the stiffy uh

  97. Manisha Shrestha says:

    How rise in energy power effect specialization

  98. Dushyant Vashisht says:

    I think Clifford wants to catch a train. Even Adriene agrees with us on this matter 4:29

  99. OHM-968692 says:

    Please speak slower

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