3. Gains from trade
Consider two neighboring island countries called Euphoria and Contente. They each have 4 million labor hours available per week that they can use to produce rye, jeans, or a combination of both. The following table shows the amount of rye or jeans that can be produced using 1 hour of labor.
Country Rye Jeans (Bushels per hour of labor) (Pairs per hour of labor) Euphoria 8 32 Contente 12 24
Initially, suppose Contente uses 1 million hours of labor per week to produce rye and 3 million hours per week to produce jeans, while Euphoria uses 3 million hours of labor per week to produce rye and 1 million hours per week to produce jeans. Consequently, Euphoria produces 24 million bushels of rye and 32 million pairs of jeans, and Contente produces 12 million bushels of rye and 72 million pairs of jeans. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of rye and jeans it produces.
Euphoria's opportunity cost of producing 1 bushel of rye isï¼ ï¼ of jeans, and Contente's opportunity cost of producing 1 bushel of rye isï¼ ï¼ of jeans. Therefore, ï¼ ï¼has a comparative advantage in the production of rye, andï¼ ï¼ has a comparative advantage in the production of jeans.
Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces rye will produce ï¼ ï¼million bushels per week, and the country that produces jeans will produce ï¼ ï¼ million pairs per week.
In the following table, enter each country's prod uction decision on the third row of the table (marked "Production").
Suppose the country that produces rye trades 26 million bushels of rye to the other country in exchange for 78 million pairs of jeans.
In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption."
When the two countries did not specialize, the total production of rye was 36 million bushels per week, and the total production of jeans was 104 million pairs per week. Because of specialization, the total production of rye has increased byï¼ ï¼million bushels per week, and the total production of jeans has increased by ï¼ ï¼million pairs per week.
Because the two countries produce more rye and more jeans under specialization, each country is able to gain from trade.
Calculate the gains from tradeâthat is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").
Euphoria
Contente
Rye Jeans Rye Jeans (Millions of bushels) (Millions of pairs) (Millions of bushels) (Millions of pairs) Without Trade Production 24 32 12 72 Consumption 24 32 12 72 With Trade Production Trade action Consumption Gains from Trade Increase in Consumption
3. Gains from trade
Consider two neighboring island countries called Euphoria and Contente. They each have 4 million labor hours available per week that they can use to produce rye, jeans, or a combination of both. The following table shows the amount of rye or jeans that can be produced using 1 hour of labor.
| Country | Rye | Jeans |
|---|---|---|
| (Bushels per hour of labor) | (Pairs per hour of labor) | |
| Euphoria | 8 | 32 |
| Contente | 12 | 24 |
Initially, suppose Contente uses 1 million hours of labor per week to produce rye and 3 million hours per week to produce jeans, while Euphoria uses 3 million hours of labor per week to produce rye and 1 million hours per week to produce jeans. Consequently, Euphoria produces 24 million bushels of rye and 32 million pairs of jeans, and Contente produces 12 million bushels of rye and 72 million pairs of jeans. Assume there are no other countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of rye and jeans it produces.
Euphoria's opportunity cost of producing 1 bushel of rye isï¼ ï¼ of jeans, and Contente's opportunity cost of producing 1 bushel of rye isï¼ ï¼ of jeans. Therefore, ï¼ ï¼has a comparative advantage in the production of rye, andï¼ ï¼ has a comparative advantage in the production of jeans.
Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing only that good. In this case, the country that produces rye will produce ï¼ ï¼million bushels per week, and the country that produces jeans will produce ï¼ ï¼ million pairs per week.
In the following table, enter each country's prod uction decision on the third row of the table (marked "Production").
Suppose the country that produces rye trades 26 million bushels of rye to the other country in exchange for 78 million pairs of jeans.
In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption."
When the two countries did not specialize, the total production of rye was 36 million bushels per week, and the total production of jeans was 104 million pairs per week. Because of specialization, the total production of rye has increased byï¼ ï¼million bushels per week, and the total production of jeans has increased by ï¼ ï¼million pairs per week.
Because the two countries produce more rye and more jeans under specialization, each country is able to gain from trade.
Calculate the gains from tradeâthat is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").
| Euphoria | Contente | |||
|---|---|---|---|---|
| Rye | Jeans | Rye | Jeans | |
| (Millions of bushels) | (Millions of pairs) | (Millions of bushels) | (Millions of pairs) | |
| Without Trade | ||||
| Production | 24 | 32 | 12 | 72 |
| Consumption | 24 | 32 | 12 | 72 |
| With Trade | ||||
| Production | ||||
| Trade action | ||||
| Consumption | ||||
| Gains from Trade | ||||
| Increase in Consumption | ||||
Related textbook solutions
Related questions
Gain from trade
Consider two neighboring island countries, Arcadia and Felicidad. Each has 72,000 labor hours available per month that it can use to produce jeans, wheat , or a combination of both. The following table shows the amount of labor hours required to produce one pair of jeans or one bushel of wheat.
|
Jeans (Labor hours per pair) |
Wheat (Labor hours per bushel) |
|
| Arcadia | 80 | 16 |
| Felicidad | 24 | 12 |
Initially , suppose Arcadia uses 54,000 hours of labor per month to produce jeans and 18,000 hours per month to produce Wheat, while Felicidad uses 18,000 hours of labor per month to produce jeans and 54,000 hours per month to produce wheat. Consequently, Arcadia produces 675 pairs of jeans and 1,125 bushels of wheat, and Felicidad produces 750 pairs of jeans and 4,500 busheis of wheat. Assume there are no other countries willing to trade goods, so in the absence of trade between the two countries, each country consumes the amount the of jeans and wheat it produces.
Arcadia's opportunity cost of prducing on pair of jeans is (1) ____________ ((5 bushels - 1/2 bushel - 2 bushels - 1/5 bushels )) of wheat, and Felicidad's opportunity cost of producing one pair of jeans is (2)_______________ (( 1/5 bushel - 1/2 bushel - 5 bushels - 2 bushels )) of wheat. Therefore,(3)_____________(( Arcadia - Felicidad )) has a comparative advantage in the production of jeans, and (4)______________(( Arcadia - Felicidad )) has a comparative advantage in the production of wheat.
Suppose that Arcadia completely specializes in the production of the good in which it has a comparative advantage, producing only that good. It will produce (5)____________(( 4500 - 3000 - 6000 - 900 )) (6)______________ ((Bushels of wheat - pairs of jeans )) .
Suppose also that Felicidad does not specialize and uses 54,000 hours of labor to produce jeans and 18,000 hours of labor to produce wheat. It will produce (7) __________(( 900 - 2250 - 3000 )) pairs of jeans and (8)__________(( 1500 - 4500 - 6000 )) bushels of wheat.
Suppose Arcadia and Felicidad agree to trade with each other, exchanging 1,100 pairs of jeans for 3,300 bushels of wheat. In particular, Arcadia will export the goods it produces and Felicidad will expor the goods that Arcadia does not produce.
With trade, Arcadia will (9)____________(( export - import )) jeans and (10)_____________(( export - import )) wheat. Felicidad will (11)__________(( export - import )) jeans and (12)___________(( export - import )) wheat .
When neithen country specializes, the total production of jeans is (13) _____________ (( 5625 - 2250 - 1425 - 6000 )) pairs per month, and the total production of wheat is (14) ___________ ((5625 - 2250 - 1425 - 6000 )) bushels per month .
When Arcadia specializes and Felicidad still produces the combination of goods using 54,000 hours of labor to produce jeans and 18,000 hours of labor to produce wheat, the total production of jeans becomes (15)___________ (( 2250 - 1425 - 5625 - 6000 )) pairs pers month , and the total production of wheat became (16)__________(( 2250 - 1425 - 5625 - 6000 )) bushels per month.
Gain from trade
Consider two neighboring island countries, Arcadia and Felicidad. Each has 72,000 labor hours available per month that it can use to produce jeans, wheat , or a combination of both. The following table shows the amount of labor hours required to produce one pair of jeans or one bushel of wheat.
|
Jeans (Labor hours per pair) |
Wheat (Labor hours per bushel) |
|
| Arcadia | 80 | 16 |
| Felicidad | 24 | 12 |
Initially , suppose Arcadia uses 54,000 hours of labor per month to produce jeans and 18,000 hours per month to produce Wheat, while Felicidad uses 18,000 hours of labor per month to produce jeans and 54,000 hours per month to produce wheat. Consequently, Arcadia produces 675 pairs of jeans and 1,125 bushels of wheat, and Felicidad produces 750 pairs of jeans and 4,500 busheis of wheat. Assume there are no other countries willing to trade goods, so in the absence of trade between the two countries, each country consumes the amount the of jeans and wheat it produces.
Arcadia's opportunity cost of prducing on pair of jeans is (1) ____________ ((5 bushels - 1/2 bushel - 2 bushels - 1/5 bushels )) of wheat, and Felicidad's opportunity cost of producing one pair of jeans is (2)_______________ (( 1/5 bushel - 1/2 bushel - 5 bushels - 2 bushels )) of wheat. Therefore,(3)_____________(( Arcadia - Felicidad )) has a comparative advantage in the production of jeans, and (4)______________(( Arcadia - Felicidad )) has a comparative advantage in the production of wheat.
Suppose that Arcadia completely specializes in the production of the good in which it has a comparative advantage, producing only that good. It will produce (5)____________(( 4500 - 3000 - 6000 - 900 )) (6)______________ ((Bushels of wheat - pairs of jeans )) .
Suppose also that Felicidad does not specialize and uses 54,000 hours of labor to produce jeans and 18,000 hours of labor to produce wheat. It will produce (7) __________(( 900 - 2250 - 3000 )) pairs of jeans and (8)__________(( 1500 - 4500 - 6000 )) bushels of wheat.
Suppose Arcadia and Felicidad agree to trade with each other, exchanging 1,100 pairs of jeans for 3,300 bushels of wheat. In particular, Arcadia will export the goods it produces and Felicidad will expor the goods that Arcadia does not produce.
With trade, Arcadia will (9)____________(( export - import )) jeans and (10)_____________(( export - import )) wheat. Felicidad will (11)__________(( export - import )) jeans and (12)___________(( export - import )) wheat .
When neithen country specializes, the total production of jeans is (13) _____________ (( 5625 - 2250 - 1425 - 6000 )) pairs per month, and the total production of wheat is (14) ___________ ((5625 - 2250 - 1425 - 6000 )) bushels per month .
When Arcadia specializes and Felicidad still produces the combination of goods using 54,000 hours of labor to produce jeans and 18,000 hours of labor to produce wheat, the total production of jeans becomes (15)___________ (( 2250 - 1425 - 5625 - 6000 )) pairs pers month , and the total production of wheat became (16)__________(( 2250 - 1425 - 5625 - 6000 )) bushels per month.
