Comparative Advantage 2 Homework

Video 99 of 245 from the course: Development Economics
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Answer to the "homework question" from the previous video.

 

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Mexicans who were making computers, after some heavy demonstrating and violent strikes to force the government to subsidize domestic computer production and to tax foreign computers, ended up working in the shirt industry and, after a few years (it takes a while to master shirt-making), earning more money than before.

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Trade will happen at a rate anywhere between the opportunity cost of a shirt in terms of computers in the USA and the opportunity cost of a computer in terms of shirts in the USA. Thus it will be at any rate between 1 to 6 shirts per computer. The proposed trade ratio of 3 shirts per computer is just 1 of many possible solutions. I think that the answer will have to do with the demand curves for both computers and shirts in the USA and in Mexico. We can't assume that a computer creates higher value than a shirt in this model, it will be the consumers that will decide that, reflected on the purchase price of both items.

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