Question

 3. Gains from trade

 Consider two neighboring island countries called Euphoria and Arcadia. They each have 4 million labor hours available per week that they can use to produce rye, jeans, or a combination of both. The following table shows the amount of rye or jeans that can be produced using 1 hour of labor.

 Initially, suppose Arcadia uses 1 million hours of labor per week to produce rye and 3 million hours per week to produce jeans, while Euphoria uses 3 million hours of labor per week to produce rye and 1 million hours per week to produce jeans. Consequently, Euphoria produces 12 million bushels of rye and 16 million pairs of jeans, and Arcadia produces 6 million bushels of rye and 36 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 rye and jeans it produces.

 Euphoria's opportunity cost of producing 1 bushel of rye is _______  of jeans, and Arcadia's opportunity cost of producing 1 bushel of rye is _______  of jeans. Therefore, _______  has a comparative advantage in the production of rye, and _______  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 rye will produce

_______  million bushels per week, and the country that produces jeans 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 rye trades 14 million bushels of rye to the other country in exchange for 42 million pairs of jeans.

 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 rye was 18 million bushels per week, and the total production of jeans was 52 million pairs per week. Because of specialization, the total production of rye has increased by _______  million bushels per week, and the total _______  production of jeans has increased by _______  million pairs per week.

 Because the two countries produce more rye 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 table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").

Answer 1

Blanks-

1) 16/4 = 4

2) 12/6 = 2

3) Arcadia

4) Euphoria

5) 6*4 =24

6) 16*4 =64

7) 24-18 = 6

8) 64-52 = 12

	Euphoria		Arcadia
	Rye	Jeans	Rye	Jeans
Without Trade
Production	12	16	6	36
Consumption	12	16	6	36
With Trade
Production	0	64	24	0
Trade action	Import 14	Export 42	Export 14	Import 42
Consumption	14	22	10	42
Gains from Trade
Increase in Consumption	2	6	4	6