Consider two neighboring island countries called Euphoria and Arcadia. They each have 4 million labor hours available per month that they can use to produce corn, jeans, or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor. Corn Country (Bushels per hour of labor) Euphoria 5 Arcadia 8 Jeans (Pairs per hour of labor) 20 16 Initially, suppose Arcadia uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans, while Euphoria uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Euphoria produces 15 million bushels of corn and 20 million pairs of jeans, and Arcadia produces 8 million bushels of corn and 48 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 corn and jeans it produces. Euphoria's opportunity cost of producing 1 bushel of corn is of jeans. Therefore, advantage in the production of jeans. of jeans, and Arcadia's opportunity cost of producing 1 bushel of corn is has a comparative has a comparative advantage in the production of corn, and
Consider two neighboring island countries called Euphoria and Arcadia. They each have 4 million labor hours available per month that they can use to produce corn, jeans, or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor. Corn Country (Bushels per hour of labor) Euphoria 5 Arcadia 8 Jeans (Pairs per hour of labor) 20 16 Initially, suppose Arcadia uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans, while Euphoria uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Euphoria produces 15 million bushels of corn and 20 million pairs of jeans, and Arcadia produces 8 million bushels of corn and 48 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 corn and jeans it produces. Euphoria's opportunity cost of producing 1 bushel of corn is of jeans. Therefore, advantage in the production of jeans. of jeans, and Arcadia's opportunity cost of producing 1 bushel of corn is has a comparative has a comparative advantage in the production of corn, and
Chapter1: Making Economics Decisions
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Transcribed Image Text:5. Comparative advantage and gains from trade
Consider two neighboring island countries called Euphoria and Arcadia. They each have 4 million labor hours available per month that they can use to
produce corn, jeans, or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor.
Corn
Jeans
Country (Bushels per hour of labor) (Pairs per hour of labor)
Euphoria
20
Arcadia
16
5
8
Initially, suppose Arcadia uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans, while Euphoria uses
3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Euphoria produces 15 million
bushels of corn and 20 million pairs of jeans, and Arcadia produces 8 million bushels of corn and 48 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 corn and jeans it
produces.
of jeans, and Arcadia's opportunity cost of producing 1 bushel of corn is
has a comparative advantage in the production of corn, and
has a comparative
Euphoria's opportunity cost of producing 1 bushel of corn is
of jeans. Therefore,
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 corn will produce
million bushels per month, and the country that produces jeans will produce
million pairs per month.
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