Question

Consider two neighboring island countries called Euphoria and Bellissima. 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. Country Rye Jeans (Bushels per hour of labor) (Pairs per hour of labor) Euphoria 4 16 Bellissima 6 12 Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans while Euphoria uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Euphoria produces 12 million bushels of rye and 16 million pairs of jeans, and Bellissima produces 6 million bushels of rye and 36 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 produces. Euphoria's opportunity cost of producing 1 bushel of rye is __(1/2, 1/4, 2, 4)___ pairs of jeans, and Bellissima's opportunity cost of producing 1 bushel of rye is __(1/2, 1/4, 2, 4)___ of jeans. Therefore, __(Euphoria or Bellissima)__ has a comparative advantage in the production of rye, and___ (Euphoria or Bellissima)__ 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 rye 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 rye trades 14 million bushels of rye to the other country in exchange for 42 million pairs of jeans. 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 rye was 18 million bushels per month, and the total production of jeans was 52 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. 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"). Euphoria Bellissima Rye Jeans Rye Jeans (Millions of bushels) (Millions of pairs) (Millions of bushels) (Millions of pairs) Without trade Production 12 16 6 36 Consumption 12 16 6 36 With trade Production ______ ______ ______ ______ Trade action (Export 14 or Import 14) (Export 42 or Import 42) (Export 14 or Import 14) (Export 42 or Import 42) Consumption _____ ______ _______ ________ Gains from trade Increase in consumption ________ _______ there should be two more answe spots under rye and jeans Also the rye and jeans should be over the numbers, I just messed up th table and cant shift it for some reason

Answer 1

From the table given, it can be deduced that Bellissima has comparative advantage in rye while Euphoria had comparative advantage in jeans.

What is comparative advantage?

It should be noted that comparative advantage simply means the ability of an economy to produce a good at a lower opportunity cost.

In this case, Euphoria's opportunity cost of rye will be:

= 16/4 = 4 jeans.

Bellisima's opportunity cost of rye will be:

= 12/6 = 2 jeans

Therefore, Bellissima has comparative advantage in rye while Euphoria had comparative advantage in jeans.

When there's complete specialization, Bellisima will produce:

= 6 × 4 = 24 million ryes

Euphoria will produce:

= 16 × 4 = 64 million jeans

After trade, the increase in production of rye will be:

= 24 - 18 = 6 million.

The increase in production of jeans will be:

= 64 - 52

= 12 million

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