Consider two neighboring island countries called Euphoria and Contente. They each have 4 million labor hours available per week that they can use to produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor. Jeans Rye Country (Pairs per hour of labor) (Bushels per hour of labor) Euphoria 5 20 Contente 8 16 Initially, suppose Contente uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce rye, while Euphoria uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce rye. Consequently, Euphoria produces 15 million pairs of jeans and 20 million bushels of rye, and Contente produces 8 million pairs of jeans and 48 million bushels 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 amount of jeans and rye it produces. Euphoria's opportunity cost of producing 1 pair of jeans is of rye, and Contente's opportunity cost of producing 1 pair of jeans is of rye. Therefore, has a comparative advantage in the production of jeans, and has a comparative advantage in the production of rye. 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 jeans will produce million pairs per week, and the country that produces rye will produce million bushels per week.
Consider two neighboring island countries called Euphoria and Contente. They each have 4 million labor hours available per week that they can use to produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor. Jeans Rye Country (Pairs per hour of labor) (Bushels per hour of labor) Euphoria 5 20 Contente 8 16 Initially, suppose Contente uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce rye, while Euphoria uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce rye. Consequently, Euphoria produces 15 million pairs of jeans and 20 million bushels of rye, and Contente produces 8 million pairs of jeans and 48 million bushels 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 amount of jeans and rye it produces. Euphoria's opportunity cost of producing 1 pair of jeans is of rye, and Contente's opportunity cost of producing 1 pair of jeans is of rye. Therefore, has a comparative advantage in the production of jeans, and has a comparative advantage in the production of rye. 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 jeans will produce million pairs per week, and the country that produces rye will produce million bushels per week.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Consider two neighboring island countries called Euphoria and Contente. They each have 4 million labor hours available per week that they can use to
produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor.
Jeans
Rye
Country
(Pairs per hour of labor)
(Bushels per hour of labor)
Euphoria
5
20
Contente
8
16
Initially, suppose Contente uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce rye, while Euphoria uses 3
million hours of labor per week to produce jeans and 1 million hours per week to produce rye. Consequently, Euphoria produces 15 million pairs of
jeans and 20 million bushels of rye, and Contente produces 8 million pairs of jeans and 48 million bushels 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 amount of jeans and rye it produces.
Euphoria's opportunity cost of producing 1 pair of jeans is
of rye, and Contente's opportunity cost of producing 1 pair of jeans is
of rye. Therefore,
has a comparative advantage in the production of jeans, and
has a comparative
advantage in the production of rye.
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 jeans will produce
million pairs per week, and the country that produces rye will produce
million bushels 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 jeans trades 18 million pairs of jeans to the other country in exchange for 54 million bushels of rye.
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 jeans was 23 million pairs per week, and the total production of rye was 68 million
bushels per week. Because of specialization, the total production of jeans has increased by
million pairs per week, and the total production of
rye has increased by
million bushels per week.
Because the two countries produce more jeans and more rye 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").
Euphoria
Contente
Jeans
Rye
Jeans
Rye
(Millions of pairs)
(Millions of bushels)
(Millions of pairs)
(Millions of bushels)
Without Trade
Production
15
20
8
48
Consumption
15
20
8
48
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption
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