3. Gains from trade Suppose there exist two imaginary countries, Glacier and Everglades. Their labor forces are each capable of supplying four million hours per week that can be used to produce shorts, almonds, or some combination of the two. The following table shows the amount of shorts or almonds that can be produced by one hour of labor. Country Glacier Everglades Shorts Almonds (Pairs per hour of labor) (Pounds per hour of labor) 8 16 5 20 Suppose that initially Glacier uses 1 million hours of labor per week to produce shorts and 3 million hours per week to produce almonds, while Everglades uses 3 million hours of labor per week to produce shorts and 1 million hours per week to produce almonds. As a result, Glacier produces 8 million pairs of shorts and 48 million pounds of almonds, and Everglades produces 15 million pairs of shorts and 20 million pounds of almonds. Assume there are no other countries willing to engage in trade, so, in the absence of trade between these two countries, each country consumes the amount of shorts and almonds it produces. Glacier's opportunity cost of producing 1 pair of shorts is of almonds. Therefore, is comparative advantage in the production of almonds. of almonds, and Everglades's opportunity cost of producing 1 pair of shorts has a comparative advantage in the production of shorts, and has a 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 shorts will produce million pairs per week, and the country that produces almonds will produce million pounds per week.
3. Gains from trade Suppose there exist two imaginary countries, Glacier and Everglades. Their labor forces are each capable of supplying four million hours per week that can be used to produce shorts, almonds, or some combination of the two. The following table shows the amount of shorts or almonds that can be produced by one hour of labor. Country Glacier Everglades Shorts Almonds (Pairs per hour of labor) (Pounds per hour of labor) 8 16 5 20 Suppose that initially Glacier uses 1 million hours of labor per week to produce shorts and 3 million hours per week to produce almonds, while Everglades uses 3 million hours of labor per week to produce shorts and 1 million hours per week to produce almonds. As a result, Glacier produces 8 million pairs of shorts and 48 million pounds of almonds, and Everglades produces 15 million pairs of shorts and 20 million pounds of almonds. Assume there are no other countries willing to engage in trade, so, in the absence of trade between these two countries, each country consumes the amount of shorts and almonds it produces. Glacier's opportunity cost of producing 1 pair of shorts is of almonds. Therefore, is comparative advantage in the production of almonds. of almonds, and Everglades's opportunity cost of producing 1 pair of shorts has a comparative advantage in the production of shorts, and has a 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 shorts will produce million pairs per week, and the country that produces almonds will produce million pounds per week.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:3. Gains from trade
Suppose there exist two imaginary countries, Glacier and Everglades. Their labor forces are each capable of supplying four million hours per week that
can be used to produce shorts, almonds, or some combination of the two. The following table shows the amount of shorts or almonds that can be
produced by one hour of labor.
Country
Glacier
Everglades
Shorts
Almonds
(Pairs per hour of labor) (Pounds per hour of labor)
8
16
5
20
Suppose that initially Glacier uses 1 million hours of labor per week to produce shorts and 3 million hours per week to produce almonds, while
Everglades uses 3 million hours of labor per week to produce shorts and 1 million hours per week to produce almonds. As a result, Glacier produces 8
million pairs of shorts and 48 million pounds of almonds, and Everglades produces 15 million pairs of shorts and 20 million pounds of almonds.
Assume there are no other countries willing to engage in trade, so, in the absence of trade between these two countries, each country consumes the
amount of shorts and almonds it produces.
Glacier's opportunity cost of producing 1 pair of shorts is
of almonds. Therefore,
is
comparative advantage in the production of almonds.
of almonds, and Everglades's opportunity cost of producing 1 pair of shorts
has a comparative advantage in the production of shorts, and
has a
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 shorts will produce
million pairs per week, and the country that produces almonds will produce
million pounds per week.
Transcribed Image Text:In the following table, enter each country's production decision on the third row of the table (marked "Production").
Suppose the country that produces shorts trades 18 million pairs of shorts to the other country in exchange for 54 million pounds of almonds.
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 shorts was 23 million pairs per week, and the total production of almonds was 68
million pounds per week. Because of specialization, the total production of shorts has increased by million pairs per week, and the total
production of almonds has increased by [ million pounds per week.
Because the two countries produce more shorts and more almonds 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).
Without Trade
Production
Consumption
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption
Glacier
8
8
Shorts
Almonds
Shorts
Almonds
(Millions of pairs) (Millions of pounds) (Millions of pairs) (Millions of pounds)
48
48
Everglades
15
15
20
20
000
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