ECO 304L Study Guide - Midterm Guide: Comparative Advantage, Opportunity Cost
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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.
| Â |
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.
| Â |
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.
