Specialization and Trade: Crash Course Economics #2

Summary

In this episode of Crash Course Economics, Adriene Hill and Mr. Clifford explore the concepts of specialization and trade, fundamental aspects of economics. They discuss how specialization, like workers in a pizza restaurant or dairy farmers and engineers, increases productivity by letting people focus on their strengths. The discussion extends into trade benefits, using a simple economic model called the production possibilities frontier to illustrate how countries can benefit from specializing and trading based on comparative advantage, like the US in airplane manufacturing versus shoes. Despite critiques, most economists agree on the mutual benefits of trade, thanking Adam Smith for his insights.

Highlights

• Adriene and Mr. Clifford agree that economics isn't as complicated as it seems and helps us make better decisions. 🧠
• History, including wars, can often be explained through economic motives, like the American Civil War. ⏳
• The industrial revolution marked a turning point in living standards, supported by economic insights from Adam Smith. 🔄
• Specialization means focusing on tasks one is best at, increasing productivity—think pizza restaurant roles. 🍕
• Trade is beneficial when individuals or countries exchange goods where they have a comparative advantage. 🤝
• The Production Possibilities Frontier model simplifies understanding trade-offs and efficient production. 📈
• Economists generally agree that specialization and trade bring worldwide benefits, despite some challenges. 🌐

Key Takeaways

• Economics helps explain historical events and is about making choices using limited resources. 🌍
• Specialization improves productivity by allowing people or countries to focus on what they do best. 🍕
• Trade allows countries to benefit by exchanging goods they are specialized in, based on comparative advantage. 🤝
• The Production Possibilities Frontier is a model that helps illustrate trade-offs and efficient resource use. 📊
• Specialization and open trade have led to significant improvements in living standards globally. 🚀

Overview

This episode of Crash Course Economics unpacks the foundational economic concepts of specialization and trade. Adriene and Mr. Clifford launch into the discussion by highlighting how economics, while sometimes steeped in complex jargon, is fundamentally about understanding scarcity and making strategic choices. They explain how throughout history, including events like the American Civil War, economic motives have played crucial roles. By examining historical benchmarks like the industrial revolution, they illustrate how specialization has significantly boosted productivity and living standards.

Specialization gets a deep dive, with a relatable example of a pizza restaurant where each worker has a distinct role, showcasing how focusing on specific tasks enhances efficiency. This idea extends to countries, where the concept of comparative advantage suggests that nations should specialize in producing goods where they have a relative efficiency edge, and trade for other needs. They use the concept of the Production Possibilities Frontier to visually explain these trade-offs and efficiencies, emphasizing the simplicity and practicality of the model despite its initial mathematical appearance.

The episode rounds off with a nod to Adam Smith's legacy in recognizing specialization's role in prosperity. They underscore how trade, although sometimes criticized, generally benefits trading partners and enhances global living standards, citing examples of countries benefiting or suffering based on their trade policies. With a promise to tackle complex issues like labor conditions in future episodes, the presenters leave us pondering the indispensable role of economics in shaping the world.

Chapters

• 00:00 - 00:30: Introduction and Basics of Economics The chapter "Introduction and Basics of Economics" in Crash Course Economics starts with the hosts, Adriene Hill and Mr. Clifford, introducing the purpose of the series: to simplify the often complex and jargon-heavy subject of economics. They emphasize that at its core, economics is about scarcity and making choices with limited resources. This foundational concept is important not just for making decisions in the present and future but also for understanding historical events and human actions. For instance, they hint that the motivations behind wars and empires can often be traced to economic desires and needs, such as the American Civil War having deeper economic underpinnings. The chapter aims to demystify economics and present it as a vital lens for understanding both current affairs and historical contexts.
• 00:30 - 01:00: Economics in History The chapter titled "Economics in History" discusses the influence of economic factors in historical events. It starts by highlighting the economic motivations behind the use of slave labor in Southern states, suggesting that these states' desire to maintain cheap labor was a significant cause of conflict. A teacher, Mr. Clifford, passionately discusses the role of economics in explaining various world phenomena, asserting its importance and appeal as a subject. Adriene humorously challenges physics while emphasizing the relevance of economics in understanding historical progress. The chapter then shifts focus to human progress over time, using indicators such as life expectancy, child mortality, and income per capita to measure advancement.
• 01:00 - 02:00: The Industrial Revolution and Adam Smith The chapter discusses the harsh living conditions of the majority of humans throughout history until the industrial revolution brought significant improvements. With the onset of the industrial revolution, there was a substantial rise in the standard of living, marked by increased population, longer life expectancies, better food supplies, and advancements like hospitals, toilets, and refrigerators. Adam Smith, considered the first modern economist, wrote 'An Inquiry Into the Nature and Causes of the Wealth of Nations' during this period, contributing significant economic thought despite his poor skills in naming books.
• 02:00 - 03:00: Specialization and Division of Labor The chapter discusses the concept of specialization and division of labor, which Adam Smith identified as the source of prosperity and wealth for countries. Using the example of a pizza restaurant, it illustrates how dividing tasks among workers increases productivity as each can focus on their specific job without wasting time switching tasks. This division of labor extends beyond simple tasks to more complex production processes.
• 03:00 - 04:00: The Benefit of Trade and Economic Models This chapter discusses the advantages of trade and specialization, as illustrated by the anecdote of a dairy farmer and various other contributors in the pizza-making process. It references Adam Smith's observation on how improved societies benefit from specialization, where each individual focuses on a specific task, thereby contributing more efficiently to the overall production process. The chapter prompts readers to imagine the complex effort involved in producing something simple, like a pizza, entirely on one's own, highlighting the benefit of trade and division of labor.
• 04:00 - 05:00: Understanding Production Possibilities Frontier (PPF) The chapter titled 'Understanding Production Possibilities Frontier (PPF)' explains the concept of specialization and its evolution through history. Without specialization, individuals would need to create everything themselves, from scratch. The text details how specialization was limited for thousands of years until the industrial revolution, which marked a significant increase in specialization. The modern era exemplifies extreme specialization, with a multitude of people working in various specialized fields.
• 05:00 - 06:30: Comparative Advantage and Trade Benefits The chapter explores the concept of comparative advantage and the benefits of trade. It introduces the idea of specialization, highlighting how individuals become more productive when focusing on what they do best and trading for other goods. Using the example of John, who is better at making pizza, and Hank, who excels at making t-shirts, the chapter illustrates how trade can make people better off by allowing each person to specialize in their area of strength and trade for what they need. This reciprocity in trade underscores the mutual benefits derived from comparative advantage.
• 06:30 - 08:00: Real World Trade and Economic Development The chapter explains the concept of the production possibilities frontier (PPF) as a model used to illustrate the benefits of trade. The model demonstrates how entities can achieve more of a product through trade compared to producing independently. It emphasizes that economization of resources and specialization can lead to increased overall production of goods like pizza and shirts, thanks to trade mechanisms. The chapter encourages readers not to be intimidated by economic models or graphs, as they are simple tools to explain complex ideas, and highlights that economists find excitement in working with these models.
• 08:00 - 09:00: Conclusion and Next Episode Preview The chapter discusses the concept of production possibilities frontier (PPF). It uses the example of the United States allocating all its resources to either produce airplanes or shoes. If all resources are used to produce airplanes, 500 can be made per day without producing any shoes. Conversely, if all resources are allocated to shoe production, 1000 tons can be produced each day without producing airplanes. This illustrates that due to limited resources, it is impossible to produce beyond the PPF, such as 500 planes and 1000 tons of shoes simultaneously. The chapter ends with Adriene intending to pose a question or discussion point related to real-world implications, highlighted by the interruption of Mr. Clifford's explanation.

Specialization and Trade: Crash Course Economics #2 Transcription

• 00:00 - 00:30 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,
• 00:30 - 01:00 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
• 01:00 - 01:30 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
• 01:30 - 02:00 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
• 02:00 - 02:30 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
• 02:30 - 03:00 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
• 03:00 - 03:30 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
• 03:30 - 04:00 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
• 04:00 - 04:30 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
• 04:30 - 05:00 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
• 05:00 - 05:30 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.
• 05:30 - 06:00 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
• 06:00 - 06:30 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
• 06:30 - 07:00 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
• 07:00 - 07:30 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
• 07:30 - 08:00 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.
• 08:00 - 08:30 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
• 08:30 - 09:00 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.