Because the two countries produce more rye and more jeans under specialization, each country isable to gain from trade.Calculate the gains from trade-that is, the amount by which each country has increased itsconsumption of each good relative to the first row of the table. In the following table, enter thisdifference in the boxes across the last row (marked "Increase in Consumption").EuphoriaContenteRye(Millions ofbushels)Jeans(Millions ofpairs)Rye(Millions ofbushels)Jeans(Millions ofpairs)Without TradeProduction1520848Consumption1520848With TradeProductionTrade actionConsumptionGains from TradeIncrease inConsumption Consider two neighboring island countries called Euphoria and Contente. They each have 4 millionlabor 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.RyeJeansCountry (Bushels per hour of labor) (Pairs per hour of labor)Euphoria520Contente816Initially, suppose Contente uses 1 million hours of labor per month to produce rye and 3 millionhours per month to produce jeans, while Euphoria uses 3 million hours of labor per month toproduce rye and 1 million hours per month to produce jeans. Consequently, Euphoria produces 15million bushels of rye and 20 million pairs of jeans, and Contente produces 8 million bushels of ryeand 48 million pairs of jeans. Assume there are no other countries willing to trade goods, so, in theabsence of trade between these two countries, each country consumes the amount of rye andjeans it produces.of jeans, and Contente'sEuphoria's opportunity cost of producing 1 bushel of rye isopportunity cost of producing 1 bushel of rye isof jeans. Therefore,has a comparative advantage in the production of rye, andhas acomparative advantage in the production of jeans.Suppose that each country completely specializes in the production of the good in which it has acomparative advantage, producing only that good. In this case, the country that produces rye willproducemillion bushels per month, and the country that produces jeans will producemillion pairs per month.In the following table, enter each country's production decision on the third row of the table(marked "Production").Suppose the country that produces rye trades 18 million bushels of rye to the other country inexchange for 54 million pairs of jeans.In the following table, select the amount of each good that each country exports and imports inthe boxes across the row marked "Trade Action," and enter each country's final consumption ofeach good on the line marked "Consumption."When the two countries did not specialize, the total production of rye was 23 million bushels permonth, and the total production of jeans was 68 million pairs per month. Because of specialization,the total production of rye has increased bymillion bushels per month, and the totalproduction of jeans has increased bymillion pairs per month.Because the two countries produce more rye and more jeans under specialization, each country isable to gain from trade.

Comparative advantage is when a country is able to produce a good at a lower opportunity cost.

Euphoria Contente Rye (Millions of bushels) Jeans Rye (Millions of bushels) Jeans (Millions of pairs) (Millions of pairs) Without Trade Production 15 20 8 48 Consumption 15 20 8 48 With Trade Production Trade action Consumption Gains from Trade Increase in Consumption

Euphoria Contente Rye (Millions of bushels) Jeans Rye (Millions of bushels) Jeans (Millions of pairs) (Millions of pairs) Without Trade Production 15 20 8 48 Consumption 15 20 8 48 With Trade Production Trade action Consumption Gains from Trade Increase in Consumption

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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