Gains from trade Suppose there exist two imaginary countries, Sequoia and Glacier. Their labor forces are each capable of supplying four million hours per day that can be used to produce pistachios, chinos, or some combination of the two. The following table shows the amount of pistachios or chinos that can be produced by one hour of labor. Country Sequoia Glacier Pistachios Chinos (Pounds per hour of labor) (Pairs per hour of labor) 20 16 Suppose that initially Glacier uses 1 million hours of labor per day to produce pistachios and 3 million hours per day to produce chinos, while Sequoia uses 3 million hours of labor per day to produce pistachios and 1 million hours per day to produce chinos. As a result, Sequoia produces 15 million pounds of pistachios and 20 million pairs of chinos, and Glacier produces 8 million pounds of pistachios and 48 million pairs of chinos. 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 pistachios and chinos it produces. Sequoia's opportunity cost of producing 1 pound of pistachios is 4 pairs of chinos, and Glacier's opportunity cost of producing 1 pound of pistachios is 2 pairs of chinos. Therefore, Glacier has a comparative advantage in the production of pistachios, and Sequoia has a comparative advantage in the production of chinos. 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 pistachios will produce million pounds per day, and the country that produces chinos will produce million pairs per day.
Gains from trade Suppose there exist two imaginary countries, Sequoia and Glacier. Their labor forces are each capable of supplying four million hours per day that can be used to produce pistachios, chinos, or some combination of the two. The following table shows the amount of pistachios or chinos that can be produced by one hour of labor. Country Sequoia Glacier Pistachios Chinos (Pounds per hour of labor) (Pairs per hour of labor) 20 16 Suppose that initially Glacier uses 1 million hours of labor per day to produce pistachios and 3 million hours per day to produce chinos, while Sequoia uses 3 million hours of labor per day to produce pistachios and 1 million hours per day to produce chinos. As a result, Sequoia produces 15 million pounds of pistachios and 20 million pairs of chinos, and Glacier produces 8 million pounds of pistachios and 48 million pairs of chinos. 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 pistachios and chinos it produces. Sequoia's opportunity cost of producing 1 pound of pistachios is 4 pairs of chinos, and Glacier's opportunity cost of producing 1 pound of pistachios is 2 pairs of chinos. Therefore, Glacier has a comparative advantage in the production of pistachios, and Sequoia has a comparative advantage in the production of chinos. 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 pistachios will produce million pounds per day, and the country that produces chinos will produce million pairs per day.
Chapter1: Making Economics Decisions
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Transcribed Image Text:3. Gains from trade
Suppose there exist two imaginary countries, Sequoia and Glacier. Their labor forces are each capable of supplying four million hours per day that can
be used to produce pistachios, chinos, or some combination of the two. The following table shows the amount of pistachios or chinos that can be
produced by one hour of labor.
Pistachios
Chinos
Country (Pounds per hour of labor) (Pairs per hour of labor)
Sequoia
Glacier
5
8
20
16
Suppose that initially Glacier uses 1 million hours of labor per day to produce pistachios and 3 million hours per day to produce chinos, while Sequoia
uses 3 million hours of labor per day to produce pistachios and 1 million hours per day to produce chinos. As a result, Sequoia produces 15 million
pounds of pistachios and 20 million pairs of chinos, and Glacier produces 8 million pounds of pistachios and 48 million pairs of chinos. 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
pistachios and chinos it produces.
Sequoia's opportunity cost of producing 1 pound of pistachios is 4 pairs of chinos, and Glacier's opportunity cost of producing 1 pound of
pistachios is 2 pairs of chinos. Therefore, Glacier has a comparative advantage in the production of pistachios, and Sequoia
comparative advantage in the production of chinos.
has a
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 pistachios will produce
million pounds per day, and the country that produces chinos will produce
million pairs per day.
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