Economics Question - Gains From Trade Consider two neighboring island countries,

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Economics Question - Gains From Trade

Consider two neighboring island countries, Contente and Euphoria. Each has 72,000 labor hours available per week that it can use to produce jeans, corn, or a combination of both. The following table shows the amount of labor hours required to produce one pair of jeans or one bushel of corn. Initially, suppose Contente uses 18,000 hours of labor per week to produce jeans and 54,000 hours per week to produce corn, while Euphoria uses 54,000 hours of labor per week to produce jeans and 18,000 hours per week to produce corn. Consequently, Contente produces 500 pairs of jeans and 4,500 bushels of corn, and Euphoria produces 1,800 pairs of jeans and 3,000 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. Contente's opportunity cost of producing one pair of jeans is of corn, and Euphoria's opportunity cost of producing one pair of jeans is of corn. Therefore, Contente or Euphoria has a comparative advantage in the production of jeans, and contente or Euphoria has a comparative advantage in the production of corn. Suppose that Contente completely specializes in the production of the good in which it has a comparative advantage, producing only that good. It will produce Pairs of Jeans or Bushels of Cora Suppose also that Euphoria does not specialize and uses 18,000 hours of labor to produce jeans and 54,000 hours of labor to produce corn. It will produce pairs of jeans and bushels of corn. Suppose Contente and Euphoria agree to trade with each other, exchanging 1,300 pairs of jeans for 5,200 bushels of corn. In particular, Contente will export the goods it produces and Euphoria will export the goods that Contente does not produce. With trade, Contente will Export or import jeans and Export or import corn. Euphoria will Export or import jeans and Export or Import corn. When neither country specializes, the total production of jeans is pairs per week, and the total production of corn is bushels per week. When Contente specializes and Euphoria still produces the combination of goods using 18,000 hours of labor to produce jeans and 54,000 hours of labor to produce corn, the total production of jeans becomes pairs per week, and the total production of corn became bushels per week.

Explanation / Answer

Contente's opp. cost of producing 1 pair of jeans is 3 bushels of corn because it takes 36 hours to produce 1 pair of jeans but only 12 to produce 1 bushel of corn. So, in the 36 hours it takes to produce 1 pair of jeans, it can also produce 3 bushels of corn.

For Euphoria, it takes 30 hours to make a pair of jeans and 6 hr to prod. 1 bush. of corn. In the 30 hrs it takes to make 1 pair of jeans, it could have made 30/6= 5 bushels of corn.

Contente would have the comparative advantage with jeans because for every pair of jeans it makes, it only loses out on 3 bushels of corn compared to Euphoria who will lose out on 5 bushels. As a result, Euphoria will have the comparative advantage in making corn because it can make more corn per pair of jeans.

As a result of that, Contente would chose to produce jeans because it has the comparative advantage in that and it will produce (18000+54000)/36=2000 pairs of jeans.

Without specializing, Euphoria will produce 18000/30= 600 pairs of jeans and 54000/6=9000 bushels of corn

If Contente produces only jeans, it will export jeans and import corn. In return, Euphoria will export corn and import jeans.

If neither specialize, there will be 500+1800=2300 jeans and 4500+3000=7500 corn

with specialization for contente, there will be 2000+600=2600 pair of jeans and 9000 bushels of corn

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