3. Gains from trade Consider two neighboring island countries called Bellissima and Felicidad. They each have 4 million labor hours available per month 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. Rye Jeans Country (Bushels per hour of labor) (Pairs per hour of labor) Bellissima 6 12 Felicidad 4 16 Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Felicidad uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Bellissima produces 6 million bushels of rye and 36 million pairs of jeans, and Felicidad produces 12 million bushels of rye and 16 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. Bellissima's opportunity cost of producing 1 bushel of rye is of jeans, and Felicidad's opportunity cost of producing 1 bushel of rye is of jeans. Therefore, has a comparative advantage in the production of rye, and 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 million bushels per month, and the country that produces jeans will produce million pairs per month.
3. Gains from trade Consider two neighboring island countries called Bellissima and Felicidad. They each have 4 million labor hours available per month 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. Rye Jeans Country (Bushels per hour of labor) (Pairs per hour of labor) Bellissima 6 12 Felicidad 4 16 Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Felicidad uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Bellissima produces 6 million bushels of rye and 36 million pairs of jeans, and Felicidad produces 12 million bushels of rye and 16 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. Bellissima's opportunity cost of producing 1 bushel of rye is of jeans, and Felicidad's opportunity cost of producing 1 bushel of rye is of jeans. Therefore, has a comparative advantage in the production of rye, and 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 million bushels per month, and the country that produces jeans will produce million pairs per month.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:3. Gains from trade
Consider two neighboring island countries called Bellissima and Felicidad. They each have 4 million labor hours available per month 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.
Rye
Jeans
Country
(Bushels per hour of labor)
(Pairs per hour of labor)
Bellissima
6.
12
Felicidad
4
16
Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Felicidad
uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Bellissima produces 6 million
bushels of
rye
and 36 million pairs of jeans, and Felicidad produces 12 million bushels of rye and 16 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.
Bellissima's opportunity cost of producing 1 bushel of rye is
of jeans, and Felicidad's opportunity cost of producing 1 bushel of rye is
of jeans. Therefore,
has a comparative advantage in the production of rye, and
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
million bushels per month, and the country that produces jeans will produce
million pairs per month.
Transcribed Image Text:When the two countries did not specialize, the total production of rye was 18 million bushels per month, and the total production of jeans was 52
million pairs per month. Because of specialization, the total production of rye has increased by
million bushels per month, and the total
production of jeans has increased by
million pairs per month.
Because the two countries produce more rye and more jeans under specialization, each country is able to gain from trade.
Calculate the gains from trade-that 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").
Bellissima
Felicidad
Rye
Jeans
Rye
Jeans
(Millions of bushels)
(Millions of pairs)
(Millions of bushels)
(Millions of pairs)
Without Trade
Production
36
12
16
Consumption
6.
36
12
16
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption
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