Gains from trade Suppose there exist two imaginary countries, Everglades and Denali. 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 Shorts Almonds (Pairs per hour of labor) (Pounds per hour of labor) Everglades 5 20 Denali 8 16 Suppose that initially Denali 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, Everglades produces 15 million pairs of shorts and 20 million pounds of almonds, and Denali produces 8 million pairs of shorts and 48 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. Everglades's opportunity cost of producing 1 pair of shorts is of almonds, and Denali's opportunity cost of producing 1 pair of shorts is of almonds. Therefore, has a comparative advantage in the production of shorts, and has a comparative advantage in the production of almonds. 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. 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”). Everglades Denali Shorts Almonds Shorts Almonds (Millions of pairs) (Millions of pounds) (Millions of pairs) (Millions of pounds) Without Trade Production 15 20 8 48 Consumption 15 20 8 48 With Trade Production Trade action Consumption Gains from Trade Increase in Consumption

Gains from trade Suppose there exist two imaginary countries, Everglades and Denali. 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 Shorts Almonds (Pairs per hour of labor) (Pounds per hour of labor) Everglades 5 20 Denali 8 16 Suppose that initially Denali 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, Everglades produces 15 million pairs of shorts and 20 million pounds of almonds, and Denali produces 8 million pairs of shorts and 48 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. Everglades's opportunity cost of producing 1 pair of shorts is of almonds, and Denali's opportunity cost of producing 1 pair of shorts is of almonds. Therefore, has a comparative advantage in the production of shorts, and has a comparative advantage in the production of almonds. 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. 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”). Everglades Denali Shorts Almonds Shorts Almonds (Millions of pairs) (Millions of pounds) (Millions of pairs) (Millions of pounds) 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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3. Gains from trade

Suppose there exist two imaginary countries, Everglades and Denali. 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	Shorts	Almonds
(Pairs per hour of labor)	(Pounds per hour of labor)
Everglades	5	20
Denali	8	16

Suppose that initially Denali 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, Everglades produces 15 million pairs of shorts and 20 million pounds of almonds, and Denali produces 8 million pairs of shorts and 48 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.

Everglades's opportunity cost of producing 1 pair of shorts is of almonds, and Denali's opportunity cost of producing 1 pair of shorts is of almonds. Therefore, has a comparative advantage in the production of shorts, and has a comparative advantage in the production of almonds.

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.

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”).

	Everglades	Denali
Shorts	Almonds	Shorts	Almonds
(Millions of pairs)	(Millions of pounds)	(Millions of pairs)	(Millions of pounds)
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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Comparative advantage refers to the ability of the nation to produce the goods at an opportunity cost lower than the other nations.

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