Question

3. Gains from trade Consider two neighboring island countries called Euphoria and Contente. They each have 4 million labor hours available per week that they can use to produce jeans, corn, or a combination of both. The following table shows the amount of jeans or corn that can be produced using 1 hour of labor. Jeans (Pairs per hour of labor) Corn (Bushels per hour of labor) Country Euphoria Contente Initially, suppose Contente uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce corn, while Euphoria uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce corn. Consequently, Euphoria produces 12 million pairs of jeans and 16 million bushels of corn, and Contente produces 6 million pairs of jeans and 36 million bushels of corn. 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 corn it produces. Euphoria's opportunity cost of producing 1 pair of jeans is of corn, and Contente's opportunity cost of producing 1 pair of jeans is of corn. Therefore, has a comparative advantage in the production of jeans, and has a comparative advantage in the production of corn. 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 week, and the country that produces corn will produce million bushels per week.

Answer 1

Blanks-

1) 16/4 = 4

2) 12/6 = 2

3) Contente

4) Euphoria

5) 6*4 = 24

6) 16*4 = 64

7) 24-18 = 6

8) 64-52 = 12

	Euphoria		Contente
	Jeans	Corn	Jeans	Corn
	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)
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