Answered: Suppose there exist two imaginary…

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Question

Suppose there exist two imaginary countries, Yosemite and Congaree. 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	Pistachios	Chinos
(Pounds per hour of labor)	(Pairs per hour of labor)
Yosemite	6	12
Congaree	4	16

Suppose that initially Yosemite uses 1 million hours of labor per day to produce pistachios and 3 million hours per day to produce chinos, while Congaree uses 3 million hours of labor per day to produce pistachios and 1 million hours per day to produce chinos. As a result, Yosemite produces 6 million pounds of pistachios and 36 million pairs of chinos, and Congaree produces 12 million pounds of pistachios and 16 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.

Yosemite's opportunity cost of producing 1 pound of pistachios is of chinos, and Congaree's opportunity cost of producing 1 pound of pistachios is of chinos. Therefore, has a comparative advantage in the production of pistachios, and 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.

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 14 million pounds of pistachios to the other country in exchange for 42 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 18 million pounds per day, and the total production of chinos was 52 million pairs per day. Because of specialization, the total production of pistachios has increased by

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

million pairs per day.

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”).

	Yosemite	Congaree
Pistachios	Chinos	Pistachios	Chinos
(Millions of pounds)	(Millions of pairs)	(Millions of pounds)	(Millions of pairs)
Without Trade
Production	6	36	12	16
Consumption	6	36	12	16
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption

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