3. Gains from tradeSuppose there exist two imaginary countries, Everglades and Yosemite. Their labor forces are each capable of supplying four million hours per day thatcan be used to produce shorts, almonds, or some combination of the two. The following table shows the amount of shorts or almonds that can beproduced by one hour of labor.CountryEvergladesYosemiteShorts(Pairs per hour of labor)58Almonds(Pounds per hour of labor)2016Suppose that initially Yosemite uses 1 million hours of labor per day to produce shorts and 3 million hours per day to produce almonds, whileEverglades uses 3 million hours of labor per day to produce shorts and 1 million hours per day to produce almonds. As a result, Everglades produces15 million pairs of shorts and 20 million pounds of almonds, and Yosemite 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 theamount of shorts and almonds it produces.Everglades's opportunity cost of producing 1 pair of shorts isshorts isof almonds. Therefore,of almonds, and Yosemite's opportunity cost of producing 1 pair ofhas a comparative advantage in the production of shorts, andhas 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. Inthis case, the country that produces shorts will producemillion pairs per day, and the country that produces almonds will producemillion pounds per day.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," andenter 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 day, and the total production of almonds was 68million pounds per day. Because of specialization, the total production of shorts has increased bymillion pairs per day, and the totalproduction of almonds has increased bymillion pounds per day.Because the two countries produce more shorts and more almonds under specialization, each country is ableCalculate 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 thetable. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").Without TradeProductionConsumptionWith TradeProductionTrade actionConsumptionGains from TradeIncrease in ConsumptionShorts(Millions of pairs)15Everglades15Almonds(Millions of pounds)2020Shorts(Millions of pairs)88Yosemite401gain from trade.Almonds(Millions of pounds)4848[h=

Comparative advantage refers to the ability of the nation to produce the goods at an opportunity…

Suppose there exist two imaginary countries, Everglades and Yosemite. Their labor forces are each capable of supplying four million hours per day 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 Everglades Yosemite Shorts (Pairs per hour of labor) 5 8 Almonds (Pounds per hour of labor) 20 16 Suppose that initially Yosemite uses 1 million hours of labor per day to produce shorts and 3 million hours per day to produce almonds, while Everglades uses 3 million hours of labor per day to produce shorts and 1 million hours per day to produce almonds. As a result, Everglades produc 15 million pairs of shorts and 20 million pounds of almonds, and Yosemite 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 amount of shorts and almonds it produces. Everglades's opportunity cost of producing 1 pair of shorts is shorts is of almonds. Therefore, of almonds, and Yosemite's opportunity cost of producing 1 pair of has a comparative advantage in the production of shorts, and has a comparative advantage in the production of almonds.

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC