Consider two neighboring island countries called Euphoria and Bellissima. They e
ID: 1135211 • Letter: C
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 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.
Initially, suppose Bellissima uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn, while Euphoria uses 3 million hours of labor per month to produce jeans and 1 million hours per month 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 month, and the country that produces corn will producemillion bushels 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 jeans trades 18 million pairs of jeans to the other country in exchange for 54 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 23 million pairs per month, and the total production of corn was 68 million bushels per month. Because of specialization, the total production of jeans has increased bymillion pairs per month, and the total production of corn has increased bymillion bushels per month.
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").
Euphoria
Bellissima
Country Jeans Corn (Pairs per hour of labor) (Bushels per hour of labor) Euphoria 5 20 Bellissima 8 16Explanation / Answer
The following table shows the amount of jeans or corn that can be produced using 4 million labor hours.
Euphoria's opportunity cost of producing 1 pair of jeans is 80/20 = 4 bushels of corn and Bellissima's opportunity cost of producing 1 pair of jeans is 64/32 = 2 bushels of corn.Therefore, Bellissima has a comparative advantage in the production of jeans because it has a lower opportunity for producing jeaans.
Similarly, Euphoria's opportunity cost of producing 1 bushel of corn is 20/80= 0.25 pair of jeans And Bellissima's opportunity cost of producing 1 bushel of corn is 32/64= 0.5 pair of jeans. Therefore, Euphoria has a comparative advantage in the production of corn because it has a lower opportunity cost for producing 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 (i.e Bellissima ) will produce 32 million pairs per month ,and the country that produces corn (i.e Euphoria) will produce 80 million bushels per month.
Suppose the country that produces jeans trades 18 million pairs of jeans to the other country in exchange for 54 million bushels of corn.
When the two countries did not specialize , the total prouduction of jeans was 23 million pairs per month and the total production of corn was 68 million bushels per month. Because of specialisation , the total production of jeans is 32 million pairs per month and total production of corn is 80 million bushels per month. Therefore, after specialisation , total production of jeans has increased by (32-23)=9 million pairs per month and total production of corn has increased by (80-68)=12 million bushels per month.
Because the two countries produce more jeans and more corn under specialisation , each country is able to gain from trade.
Country Jeans (millions of pairs) Corn (millions of bushels) Euphoria 20 80 Bellissima 32 64