Question

Consider two neighboring island countries called Dolorium and Bellissima. They each have 4 million labor hours available per month 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)
Dolorium	5	20
Bellissima	8	16

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

Dolorium’s opportunity cost of producing 1 pair of jeans is   of rye, and Bellissima's opportunity cost of producing 1 pair of jeans is   of rye. Therefore,   has a comparative advantage in the production of jeans, and   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

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

million bushels per month.

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

	Dolorium		Bellissima
	Jeans	Rye	Jeans	Rye
	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)
Without Trade
Production	15	20	8	48
Consumption	15	20	8	48
With Trade
Production
Imports/Exports
Consumption
Gains from Trade
Increase in Consumption

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 previous table, use the dropdown menus across the row labeled “Imports/Exports” to select the amount of each good that each country imports and exports. Then enter each country’s final consumption of each good on the line labeled “Consumption.”

When the two countries did not specialize, the total production of jeans was 23 million pairs per month, and the total production of rye was 68 million bushels per month. Because of specialization, the total production of jeans has increased by

million pairs per month, and the total production of rye has increased by

million bushels per month.

Because the two countries produce more jeans and more rye 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 previous table. Enter this difference in the boxes across the last row (labeled “Increase in Consumption”).

Answer 1

Dolorium’s opportunity cost of producing 1 pair of jeans is = 20/5= 4 bushels of rye, and Bellissima’s opportunity cost of producing 1 pair of jeans = 16/8 = 2 bushels of rye. Therefore, Bellissima has a comparative advantage in the production of jeans (lower opportunity cost), and Dolorium has a comparative advantage in the production of rye.

After specialization:

Jeans produced = 8 x 4 = 32 mn pairs per month

Rye produced = 20 x 4 = 80 mn bushels per month

Because of specialization, the total production of rye has increased by = 80 - 68 = 12 mn bushels per month , and the total production of jeans has increased by= 32 - 23 = 9 mn pairs of month

	Dolorium		Bellissima
	Jeans	Rye	Jeans	Rye
Without Trade
Production	15	20	8	48
Consumption	15	20	8	48
With Trade
Production	0	80	32	0
Trade Action	import 18	export 54	export 18	import 54
Consumption	18	26	14	54
Gains from Trade
Increase in Consumption	3	6	6	6