Consider two neighboring island countries called Arcadia and Felicidad. They each have 4 million labour hours available per month that they can use to produce jeans, rye, or a combination of both. The following table shows the quantity of jeans or rye that can be produced using one hour of labour. Arcadia Felicidad Jeans (Pairs per hour of labour) 5 Initially, suppose Arcadia uses 1 million hours of labour per month to produce jeans and 3 million hours per month to produce rye, while Felicidad uses 3 million hours of labour per month to produce jeans and 1 million hours per month to produce rye. Consequently, Arcadia produces 5 million pairs of jeans and 30 million kilograms of rye, and Felicidad produces 12 million pairs of jeans and 16 million kilograms of rye. Assume there are no other countries willing to trade goods, so in the absence of trade between these two countries, each country consumes the quantity of jeans and rye it produces. Arcadia's opportunity cost of producing one pair of jeans is 2 kilograms of rye, and Felicidad's opportunity cost of producing one pair of jeans is 4 kilograms of rye. Therefore, Arcadia ▼ has a comparative advantage in the production of jeans and Felicidad has a comparative advantage in the production of rye. 4 Suppose that each country specialises entirely in the production of the good in which has a comparative advantage, producing only that good. In this case, the country that produces jeans will produce 20 million pairs per month, and the country that produces rye will produce 64 million kilograms per month. In the table at the end of this problem, enter each country's production decision in the row labeled "Production." Suppose the country that produces jeans trades 13 million pairs of jeans to the other country in exchange for 39 million kilograms of rye. In the table at the end of this problem, select the quantity of each good that each country exports and imports in the boxes across the row labeled "Trade," and enter each country's final consumption of each good on the row labeled "Consumption." Without Trade Prod. and consumption With Trade Production When the two countries did not specialise, the total production of jeans was 17 million pairs per month and the total production of rye was 46 million kilograms per month. Because of specialisation, the total production of jeans has increased by 3 million pairs per month, and the total production of rye has increased by 18 million kilograms per month. Because the two countries produce more jeans and more rye under specialisation, each country is able to gain from trade. Calculate the gains from trade-in this case, the amount by which each country has increased its consumption of each good relative to the quantities given in the first row of the table. In the table, enter this difference in the row labeled "Increase in consumption." Trade Rye (Kilograms per hour of labour) 10 Consumption Gains from Trade Increase in consumption Jeans (Millions of pairs) 5 Gives or gets 13 Arcadia Rye Jeans (Millions of kilograms) (Millions of pairs) 30 Glves or gets 39 12 Felicidad Gives or gets 13 Rye (Millions of kilograms) 16 Glves or gets 39 Choose give or gets for these

Consider two neighboring island countries called Arcadia and Felicidad. They each have 4 million labour hours available per month that they can use to produce jeans, rye, or a combination of both. The following table shows the quantity of jeans or rye that can be produced using one hour of labour. Arcadia Felicidad Jeans (Pairs per hour of labour) 5 Initially, suppose Arcadia uses 1 million hours of labour per month to produce jeans and 3 million hours per month to produce rye, while Felicidad uses 3 million hours of labour per month to produce jeans and 1 million hours per month to produce rye. Consequently, Arcadia produces 5 million pairs of jeans and 30 million kilograms of rye, and Felicidad produces 12 million pairs of jeans and 16 million kilograms of rye. Assume there are no other countries willing to trade goods, so in the absence of trade between these two countries, each country consumes the quantity of jeans and rye it produces. Arcadia's opportunity cost of producing one pair of jeans is 2 kilograms of rye, and Felicidad's opportunity cost of producing one pair of jeans is 4 kilograms of rye. Therefore, Arcadia ▼ has a comparative advantage in the production of jeans and Felicidad has a comparative advantage in the production of rye. 4 Suppose that each country specialises entirely in the production of the good in which has a comparative advantage, producing only that good. In this case, the country that produces jeans will produce 20 million pairs per month, and the country that produces rye will produce 64 million kilograms per month. In the table at the end of this problem, enter each country's production decision in the row labeled "Production." Suppose the country that produces jeans trades 13 million pairs of jeans to the other country in exchange for 39 million kilograms of rye. In the table at the end of this problem, select the quantity of each good that each country exports and imports in the boxes across the row labeled "Trade," and enter each country's final consumption of each good on the row labeled "Consumption." Without Trade Prod. and consumption With Trade Production When the two countries did not specialise, the total production of jeans was 17 million pairs per month and the total production of rye was 46 million kilograms per month. Because of specialisation, the total production of jeans has increased by 3 million pairs per month, and the total production of rye has increased by 18 million kilograms per month. Because the two countries produce more jeans and more rye under specialisation, each country is able to gain from trade. Calculate the gains from trade-in this case, the amount by which each country has increased its consumption of each good relative to the quantities given in the first row of the table. In the table, enter this difference in the row labeled "Increase in consumption." Trade Rye (Kilograms per hour of labour) 10 Consumption Gains from Trade Increase in consumption Jeans (Millions of pairs) 5 Gives or gets 13 Arcadia Rye Jeans (Millions of kilograms) (Millions of pairs) 30 Glves or gets 39 12 Felicidad Gives or gets 13 Rye (Millions of kilograms) 16 Glves or gets 39 Choose give or gets for these

MACROECONOMICS

14th Edition

ISBN:9781337794985

Author:Baumol

Publisher:Baumol

Chapter18: International Trade And Comparative Advantage

Section: Chapter Questions

Problem 2TY

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