omparative advantage and gains from trade Consider two neighboring island countries called Bellissima and Felicidad. 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) Bellissima 8 16 Felicidad 5 20 Initially, suppose Bellissima uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans, while Felicidad uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Bellissima produces 8 million bushels of corn and 48 million pairs of jeans, and Felicidad produces 15 million bushels of corn and 20 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. Bellissima’s opportunity cost of producing 1 bushel of corn is __(1/2pair / 1/4pair / 4pairs / 2pairs) of jeans, and Felicidad's opportunity cost of producing 1 bushel of corn is (1/2pair / 1/4pair / 4pairs / 2pairs) of jeans. Therefore, _(Bellissima / Felicidad) has a comparative advantage in the production of corn, and _(Bellissima / Felicidad) has a comparative 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.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Comparative advantage and gains from trade

Consider two neighboring island countries called Bellissima and Felicidad. 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)
Bellissima	8	16
Felicidad	5	20

Initially, suppose Bellissima uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans, while Felicidad uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Bellissima produces 8 million bushels of corn and 48 million pairs of jeans, and Felicidad produces 15 million bushels of corn and 20 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.

Bellissima’s opportunity cost of producing 1 bushel of corn is ______(1/2pair / 1/4pair / 4pairs / 2pairs) of jeans, and Felicidad's opportunity cost of producing 1 bushel of corn is ______(1/2pair / 1/4pair / 4pairs / 2pairs) of jeans. Therefore, _______(Bellissima / Felicidad) has a comparative advantage in the production of corn, and _______(Bellissima / Felicidad) has a comparative 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.

In the following table, enter each country's production decision on the third row of the table (labeled “Production”).

	Corn	Jeans	Corn	Jeans
	Bellissima	Bellissima	Felicidad	Felicidad
	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)
Without Trade
Production	8	48	15	20
Consumption	8	48	15	20
With Trade
Production	_______	_______	_______	________
Imports/Exports	____(Imports 18 / Exports 18)	____(Imports 54 / Exports 54)	____(Imports 18 / Exports 18)	____(Imports 54 / Exports 54)
Consumption	________	________	________	______
Gains from Trade
Increase in Consumption	______	________	________	_______

Suppose the country that produces corn trades 18 million bushels of corn to the other country in exchange for 54 million pairs of jeans.

In the previous table, use the dropdown menus across the row labeled “Imports/Exports” to select the amount of each good that each country imports and exports. Then enter each country’s final consumption of each good on the line labeled “Consumption.”

When the two countries did not specialize, the total production of corn was 23 million bushels per month, and the total production of jeans was 68 million pairs per month. Because of specialization, the total production of corn has increased by _____ million bushels per month, and the total production of jeans has increased by ____ million pairs per month.

Because the two countries produce more corn and more jeans 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 previous table. Enter this difference in the boxes across the last row (labeled “Increase in Consumption”).

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