Question

3. Gains from trade Consider two neighboring island countries called Arcadia and Euphoria. They each have 4 million labor hours available per month 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 Arcadia Euphoria in 16 + Initially, suppose Arcadia uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn, while Euphoria uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Arcadia produces 5 million pairs of jeans and 30 million bushels of corn, and Euphoria produces 12 million pairs of jeans and 16 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. Arcadia's opportunity cost of producing 1 pair of jeans is of corn, and Euphoria'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 month, and the country that produces corn will produce million bushels per month.

Answer 1

Blanks:-

1) 10/5=2

2) 16/4=4

3) Arcadia

4) Euphoria

5) 5*4=20

6) 16*4=64

7) 20-17=3

8) 64-46 = 18

13 million jeans for 39 million corn is being exchanged, so

	Arcadia		Euphoria
	Jeans	Rye	Jeans	Rye
	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)
Without Trade
Production	5	30	12	16
Consumption	5	30	12	16
With Trade
Production	20	0	0	64
Trade action	Export 13	Import 39	Import 13	Export 39
Consumption	7	39	13	25
Gains from Trade
Increase in Consumption	2	9	1	9