Question

3. Gains from trade Consider two neighboring Island countries called Bellissima and Euphoria. They each have 4 million labor hours available per month that they can use to produce corn, Jeans, or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor. Corn (Bushels per hour of labor) Jeans (Pairs per hour of labor) Country Bellissima Euphoria Initially, suppose Bellissima uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce Jeans, while Euphoria uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Bellissima produces 8 million bushels of corn and 48 million pairs of Jeans, and Euphoria produces 15 milion bushels of corn and 20 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 com and jeans it produces. Bellissima's opportunity cost of producing 1 bushel of comis of jeans, and Euphoria's opportunity cost of producing 1 bushel of corn is of jeans. Therefore, has a comparative advantage in the production of corn, 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 corn will produce million bushels per month, and the country that produces jeans will produce million pairs per month, in the following table, enter each country's production decision on the third row of the table (marked "Production Suppose the country that produces corn trades 18 million bushels of com to the other country in exchange for 54 million pairs of jeans.

Answer 1

Table 1 uutput produced uang I hour of luler Con (Buthel pelhur of laber) (Parso per bag Country Bellissima Euphoria Both countries have 4 million of labur. Bellissing use I nullin hours of labur to produce en ond 3 million how to produce Jeans Euphonia used 3 million hours of labor to produce com and I million how to produce Jeund! be 2 out but produce by 4 million of later coon (bushel in millena Trans (Pain is millon) - 48 Bellissima (1m, 3M) Euphina (3H, IN) 15 20 The alune table show that, Bellissime can produce & millions of cum and 48 million, of Jeans, and fubhan can produce 15 million of corn and 20 million of Jeans - Toble:3 opportunity Cest a oppotuning cost opportunity cost of Producing Com in term of Jeane (1613): 2 Jeans - I (2015) = 4 Jeans Belissing Euphoria of producing Sant in terms of um, (3/10), = 0.5 cm I (5,0) = 0.25

Tere Bellisime hes lawrot opportundy cost of predensing Cum in terms Jean is t h e than B than Euphona, which implies that Bellissima had comparative advantage io cuon produchon, and Euphone has lowest apportandy cast of por during Jean in terme of Corn than Bellissing, which implies that Euphin has comparative advantage in Jean production Bellissime opportunity cost of producing I bashel of coon is a prin of Jean and Euphoria opportunity cart of producing I bushel of com id 4 pain of jen. Therefore Bellimine has a compartire eduentage in the production of won and Euphonia has a comparative adventure in the production of Jeans Now country will produce only one good in which they have comparance adventag by using 4 million har of laber do Bellissim, will produce I only con and Euphrin will produce only Jeans Table 4. Production (Aft, Specialization Coon whel in millen 32 Jeans (Pair in million o 30 Bellisima T Euphonia Sappose that each country completely specialeze is the producten of the good in which it has a comparative advendage, producing only that good

In this cove the country that produce cern will produce 32 million bushel I por month and the country that produce jeans will produce so million per month When the counties did not Specialize the total production of con uns 23 million and total production of Jean was 68 million pair per mondh (See table 2) Beruuse of Specializahm the total production of an increas by 9 millim por month and total production of Jeon has incrund by 12 million puir per much. Buth centuries are ready to exchange 18 millions of corn with 54 million pair of Jens. Bellissima Ceon Euphina cern Jean, (Millions of puro) (Hobimallible) (till. ) Jeans corn (millims of bushel, 8 20 Without Trede hiduction Consumption With trede 48 48 15 15 20 I 2 Production 32 80 Impoot = (54). 54 _L Impat = 818) 18 Tr. de exction Export = (18) • Cenfumption 14 Gain from the de Anorek in Centum! Esport (54) 26. 3 6