Question

Alleme: 1 3. Gains from trade Consider two neighboring island countries called Contente and Euphoria. 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. Rye (Bushels per hour of labor) Jeans (Pairs per hour of labor) Country Contente Euphoria Initially, suppose Contente 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, Contente produces 6 million bushels of Tye and 36 million pairs of jeans, and Euphoria produces 12 million bushels of rye and 16 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 Contente's opportunity cost of producing 1 bushel of rye is of jeans, and Euphoria'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 pics per week

Answer 1

Contente's opportunity cost of producing 1 bushel of rye is = 12/6 = 2 pairs of jeans and Euphoria's opportunity cost of producing 1 bushel of rye is = 16/4 = 4 pairs of jeans. Therefore, Contente has a comparative advantage in the production of rye (lower opportunity cost), and Euphoria has a comparative advantage in the production of jeans.

After specialization:

Jeans produced = 16 x 4 = 64 mn pairs per week

Rye produced = 6 x 4 = 24 mn bushels per week

Because of specialization, the total production of rye has increased by = 24 - 18 = 6 mn bushels per week , and the total production of jeans has increased by= 64 - 52 = 12 mn pairs of week

	Contente		Euphoria
	Rye	Jeans	Rye	Jeans
Without Trade
Production	6	36	12	16
Consumption	6	36	12	16
With Trade
Production	24	0	0	64
Trade Action	export 14	import 42	import 14	export 42
Consumption	10	42	14	22
Gains from Trade
Increase in Consumption	4	6	2	6