2. Gains from trade Consider two neighboring island countries called Contente an

Question

2. Gains from trade Consider two neighboring island countries called Contente and Dolorium. They each have 4 million labor hours available per week 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 Rye (Bushels per hour of labor) Country Contente Dolorium Jeans (Pairs per hour of labor) 16 20 Initially, suppose Contente uses I million hours of labor per week to produce rye and 3 million hours per week to produce Jeans, while Dolorlum uses 3 million hours of labor per week to produce rye and i millian hours per week to produce jeans. Consequently, Contente produces 3 millior bushels of rve and 4e million pairs of jeans, and Dolorium produces i5 million bushels of rve and 20 million pairs of jeans. Assume there are no othter countries willing to trade goods, so, in the absence of trade between these two countries, each country consumes the amount of rve and jeans it produces. Contente s epertunity cost of producing 1 bushel of rve s2 Brs of jeans, and Dolorium s opportunity cost of producing 1 bushel of rye ls has a comparative advantage in the production of rye and E tt has a comparative 4 i ofjeans. Therefore cent st advantage in the production of jeans Suppose that each country completelv specializes n the production of the pood in which it has a comparative ad-vantage, producing only that case, the country that produces rve will prodvce 32 illiorn bushels per week and the country that produces jeane wlf produce

Explanation / Answer

Consider the given problem here there are 2 countries “Content=C” and “Dolorium=D”. So, according to the given information in the given problem, we can find out the PPC for each country.

So, for “C”, the PPC is given by, R/8 + J/16 = 4million, where R=Rye and J=Jeans, with slope, (dJ/dR) = (-2), the opportunity cost of producing “R” is “2”, the opportunity cost of producing “J” is”1/2” for “C”.

So, for “D”, the PPC is given by, R/5 + J/20 = 4million, where R=Rye and J=Jeans, with slope, (dJ/dR) = (-4), the opportunity cost of producing “R” is “4”, the opportunity cost of producing “J” is”1/4” for “D”.

So, since opportunity cost of producing “R” in “C” is less than in “D”, => “C” has “comparative advantage” in “R” and “D” has a comparative advantage in producing “J”.

Suppose that each country 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 “R”(“C”) will produce “32=8*4” million bushels per week and the country that produces “J”(“D”) will produce “80=20*4”.

When the 2 country did not specialize, the total production of “R” was “23” million bushels per week and the total production of “J” was “68” million pair per week. Because of the specialization, the total production of “R” has increased by “32-23=9” million bushels per week and the total production of “J” has increased by “80-68=12” million pairs.

So, “C” has a comparative advantage in producing “R” and will only produce “R=32” and “J=0”. So, “C” will export “18” of “R” in exchange of “54” of “J”. So, “C” will consume “32-18=14” of “R” and “54” of “J”.

So, “D” has a comparative advantage in producing “J” and will only produce “R=0” and “J=80”. So, “D” will import “18” of “R” in exchange of “54” of “J”. So, “D” will consume “18” of “R” and “80-54=26” of “J”.

So, for “C”, the increase in the consumption of “R” is “14-8=6” and of “J” is “54-48=6”. So, for “D”, the increase in the consumption of “R” is “18-15=3” and of “J” is “26-20=6”.

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