Question

Consider two neighboring island countries called Euphoria and Bellissima. They each have 4 million labor hours available per week 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.Country Jeans Corn (Pairs per hour of labor) (Bushels per hour of labor)Euphoria 5 20Bellissima 8 16Initially, suppose Bellissima uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce corn, while Euphoria uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce corn. Consequently, Euphoria produces 15 million pairs of jeans and 20 million bushels of corn, and Bellissima produces 8 million pairs of jeans and 48 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.Euphoria’s opportunity cost of producing 1 pair of jeans is of corn, and Bellissima'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 producemillion pairs per week, and the country that produces corn will producemillion bushels per week.In the following table, enter each country's production decision on the third row of the table (labeled "Production"). Euphoria Bellissima Jeans Corn Jeans Corn (Millions of pairs) (Millions of bushels) (Millions of pairs) (Millions of bushels)Without TradeProduction 15 20 8 48Consumption 15 20 8 48With TradeProduction Imports/Exports Consumption Gains from TradeIncrease in Consumption Suppose the country that produces jeans trades 18 million pairs of jeans to the other country in exchange for 54 million bushels of corn.In the previous table, use the dropdown menus across the row labeled "Imports/Exports" to select the amount of each good that each country imports and exports. Then enter each country’s final consumption of each good on the line labeled "Consumption."When the two countries did not specialize, the total production of jeans was 23 million pairs per week, and the total production of corn was 68 million bushels per week. Because of specialization, the total production of jeans has increased bymillion pairs per week, and the total production of corn has increased bymillion 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 previous table. Enter this difference in the boxes across the last row (labeled "Increase in Consumption").

Answer 1

Answer:

Country Jeans Corn

Euphoria 5 20 (15 + 20)

Bellissima 8 16 (8 + 48)

Bellisima's opportunity cost:  

• Production of corn per million hours of labor = 8 / 16 = 0.5 pairs of jeans
• Production of jeans per million hours of labor = 16 / 8 = 2 bushels of corn

Euphoria's opportunity cost:  

• Production of corn per million hours of labor = 5 / 20 = 0.25 pairs of jeans
• Production of jeans per million hours of labor = 20 / 5 = 4 bushels of corn

Euphoria has a comparative advantage int he production of corn while Bellisima has a comparative advantage in the production of jeans.

If both countries specialize:

• Euphoria will produce 80 million bushels of corn.
• Bellisima will produce 32 million pairs of jeans.

Total production of corn has increased by 12 million bushels.

Total production of jeans has increased by 9 million pairs.

Assuming that Bellisima trades 18 million pairs of jeans and Euphoria exchanges 54 million bushels of corn, then:

• Euphoria's consumption of jeans will increase by 3 million pairs, while their consumption of corn will increase by 6 million bushels.
• Bellisima's consumption of jeans will increase by 10 million pairs, while their consumption of corn will increase by 6 million bushels.