Question

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

Country	Jeans	Rye
	(Pairs per hour of labor)	(Bushels per hour of labor)
Bellissima	8	16
Dolorium	5	20

Initially, suppose Bellissima uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce rye, while Dolorium uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce rye. Consequently, Bellissima produces 8 million pairs of jeans and 48 million bushels of rye, and Dolorium produces 15 million pairs of jeans and 20 million bushels of rye. 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 jeans and rye it produces.

Bellissima's opportunity cost of producing 1 pair of jeans is2 bushels of rye, and Dolorium's opportunity cost of producing 1 pair of jeans is4 bushels of rye. Therefore, Bellissima has a comparative advantage in the production of jeans, and Glorium has a comparative advantage in the production of rye.

Explanation:

Using an hour of labor, Bellissima can produce 8 pairs of jeans or 16 bushels of rye. Therefore, the opportunity cost of a pair of jeans is 2 bushels per pair (16 bushels8 pairs16 bushels8 pairs). Using an hour of labor, Dolorium can produce 5 pairs of jeans or 20 bushels of rye. Therefore, the opportunity cost of a pair of jeans is 4 bushels per pair (20 bushels5 pairs20 bushels5 pairs). Since Bellissima gives up fewer bushels per pair of jeans, it has a comparative advantage in the production of jeans.

You can compute Bellissima's opportunity cost of a bushel of rye by taking the reciprocal of the opportunity cost of a pair of jeans. That is, the opportunity cost of a bushel of rye, in this case, is 1/2 pair per bushel. Similarly, Dolorium's opportunity cost of a bushel of rye is equal to 1/4 pair per bushel. Since Dolorium gives up fewer pairs of jeans per bushel of rye, it has a comparative advantage in the production of rye.

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 jeans will produce

48

million pairs per week, and the country that produces rye will produce

128

million bushels per week.

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

Explanation:

Recall that Bellissima has a comparative advantage in the production of jeans and that Dolorium has a comparative advantage in the production of rye. If Bellissima completely specializes in the production of jeans, it produces 32 million pairs of jeans (4 million hours×8 pairs of jeans per hour4 million hours×8 pairs of jeans per hour). Similarly, if Dolorium completely specializes in the production of rye, it produces 80 million bushels of rye (4 million hours×20 bushels of rye per hour4 million hours×20 bushels of rye per hour).

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

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."

Answer 1

Following is the output table when both countries use 4 million hours per good.

	Jeans (Million)	Rye (Million)
Bellissima	8 x 4 = 32	16 x 4 = 64
Dolorium	5 x 4 = 20	20 x 4 = 80

(1) Opportunity cost (OC)

In Bellisima, OC of Jeans = 64/32 = 2 Rye

In Dolorium, OC of Jeans = 80/20 = 4 Rye

(2) So,

Bellissima has comparative advantage in Jeans (because it can produce Jeans at a lower OC: 2 < 4).

Dolorium has comparative advantage in Rye.

(3)

Country making Jeans (Bellissima) will produce 32 million Jeans and Country making Rye (Dolorium) will produce 80 million Rye.

(4) Bellissima trades (exports) 18 million Jeans in exchange of (imports) 54 million Rye, and Dolorium trades (exports) 54 million Rye in exchange of (imports) 18 million Jeans.

	Bellissima		Dolorium
	Jeans	Rye	Jeans	Rye
WITHOUT TRADE:
Prod. & Consumption	8	48	15	20
WITH TRADE
Production	32	0	0	80
Trade Action:	Export:	Import:	Import:	Export:
	18 Rye	54 Jeans	18 Rye	54 Jeans
Consumption	14	54	18	26
GAIN FROM TRADE
Increase in Consumption	6	6	3	6