Question

2. Gains from trade Consider two neighboring island countries called Felicidad and Arcadia. They each have 4 million labor hours available per week that they can use to produce jeans, corn, or combination of both. The following table shows the amount of jeans or corn that can be produced using 1 hour of labor. Jeans Corn (Pairs per hour of labor) (Bushels per hour of labor) Country Felicidad 8 32 Arcadia 12 24 Initially, suppose Arcadia uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce corn, while Felicidad uses 3 million hours of labor per week to produce jeans and million hours per week to produce corn. Consequently, Felicidad produces 24 million pairs of jeans and 32 million bushels of corn, and Arcadia produces 12 million pairs of jeans and 72 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 Felicidad's opportunity cost of producing of corn, and Arcadia's opportunity cost of producing 1 pair of jeans is pair of jeans is has a comparative advantage in the production of jeans, and of corn. Therefore, 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. In the following table, enter each country's production decision on the third row of the table (marked "Production"). Suppose the country that produces jeans trades 26 million pairs of jeans to the other country in exchange for 78 million bushels of corn In the following table, select the amount of each good that each country exports and imports in the boxes across the row marked "Trade Action," and enter each country's final consumption of each good on the line marked "Consumption." When the two countries did not specialize, the total production of jeans was 36 million pairs per week, and the total production of corn was 104 million bushels per week. Because of specialization, the total production of jeans has increased by million pairs per week, and the total production of corn has increased by million bushels per week. Because the two countries produce more jeans and more corn under specialization, each country is able to gain from trade. Calculate 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 following table, enter this difference in the boxes across the last row (marked "Increase in Consumption "). Felicidad Arcadia Jeans Corn Jeans Corn (Millions of pairs) (Millions of bushels) (Millions of pairs) (Millions of bushels) Without Trade Production 12 72 24 32 32 12 72 Consumption 24 With Trade Production Trade Action Consumption Gains from Trade Increase in Consumption

Answer 1

Date Gaad 20m Tens Celiaidan 's f peaduugy pai a opp tot of producaig Ipasa of jeaas 84orr Arcaolie's Thercpor Areada has CA en Felecolad has CA soien ad Teapaed Corn paed2 30 12 x4 48 m /28 32x 4- l2ulban dymlecon Thus padrces Teans Coun inneass alalad Areaolie Teaus Corn Corn Tee 72 2 24 32 7 2 22 12 24 wintd Prod y8 Tnposr B m Paace Paport 26M 26 M 78 26 T0 18