Suppose that initially Denali uses 1 million hours of labor per week to produce pistachios and 3 million hours per week to produce chinos, while Sequoia uses 3 million hours of labor per week to produce pistachios and 1 million hours per week to produce chinos. As a result, Sequoia produces 24 million pounds of pistachios and 32 million pairs of chinos, and Denali produces 12 million pounds of pistachios and 72 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 is4 pairs of chinos, and Denali's opportunity cost of producing 1 pound of pistachios is2 pairs of chinos. Therefore,Sequoia has a comparative advantage in the production of pistachios, andDenali 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 week, and the country that produces chinos will produce

ENGR.ECONOMIC ANALYSIS

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ISBN:9780190931919

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Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose that initially Denali uses 1 million hours of labor per week to produce pistachios and 3 million hours per week to produce chinos, while Sequoia uses 3 million hours of labor per week to produce pistachios and 1 million hours per week to produce chinos. As a result, Sequoia produces 24 million pounds of pistachios and 32 million pairs of chinos, and Denali produces 12 million pounds of pistachios and 72 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 is4 pairs of chinos, and Denali's opportunity cost of producing 1 pound of pistachios is2 pairs of chinos. Therefore,Sequoia has a comparative advantage in the production of pistachios, andDenali 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 week, and the country that produces chinos will produce

million pairs 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 pistachios trades 26 million pounds of pistachios to the other country in exchange for 78 million pairs of chinos.

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 pistachios was 36 million pounds per week, and the total production of chinos was 104 million pairs per week. Because of specialization, the total production of pistachios has increased by

million pounds per week, and the total production of chinos has increased by

million pairs per week.

Because the two countries produce more pistachios and more chinos 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”).

	Sequoia	Denali
Pistachios	Chinos	Pistachios	Chinos
(Millions of pounds)	(Millions of pairs)	(Millions of pounds)	(Millions of pairs)
Without Trade
Production	24	32	12	72
Consumption	24	32	12	72
With Trade
Production
Trade action	Imports 26	Exports 78	Imports 26	Exports 78
Consumption
Gains from Trade
Increase in Consumption

Definition Video Definition Ability of a country to produce goods and services at a lower opportunity cost compared to other countries. Here, opportunity cost refers to the forgone units of one good in order to produce one more unit of another good. For example, the opportunity cost of producing good X in country A is 2Y and in country B is 1.25Y. Country B has a lower opportunity cost of producing good X than country A. Therefore, country B has a comparative advantage in the production of good X. Video

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