Question

3. Gains from trade Consider two neighboring island countries called Bellissima and Dolorium. They each have 4 million labor hours available per month 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 Country (Pairs per hour of labor) 10 16 nitially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, whille Dolorium uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Belissima produces 5 million bushels of rye and 30 million pairs of jeans, and Dolorium 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 Bellissima's opportunity cost of producing 1 bushel of rye is of jeans, and Doloriun'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 spedializes 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 month, and the country that produces jeans will produce million pairs per month In the lollowing table, enter each country's production decision on the third row of the table (marked "Production Suppose the country that produces rye trades 13 million bushels of rye to the other country in exchange for 39 million pairs of jeans. In the following table, select the amount of each good that each untry exports and imports in the boxes across the row marked Trade Action, and enter each country's inai consumption of each good on the lNne marked "Consumption. When the two countries did not specialize, the total production of rye was 17 million bushels per month, and the total production of jeans was 46 million pairs per month. Because of specialization, the total production of rye has increased by million bushels per month, and the total production of jeans has increased by million pairs per month Because the two countries produce more rye and more jeans under specialization, each country is able to gain from trade. Calcuwate 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 table. In the rollowing table, enter this differenice in the boxes across the last row (marked "Increase in Corisunmption. Rye Rye (Millions of bushels) (Miilions of pairs) (Millions of bushels) (Milions of pairs) Without Trade 30 12 16 30 12 16 With Trade Trade action Gains from Trade

Answer 1

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eans Rye Seans 6 C G29 25 20-13: 29 la 39-3o 9 13