3. Gains from trade Consider two neighboring Island countries called Contente and Felicidad. 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 Contente Felicidad Jeans Corn (Pairs per hour of labor) (Bushels per hour of labor) 6 12 4 16 Initially, suppose Contente uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce com, while Felicidad uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce corn. Consequently, Contente produces 6 million pairs of Jeans and 36 million bushels of corn, and Felicidad produces 12 million pairs of jeans and 16 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 comit produces Contente's opportunity cost of producing 1 pair of jeans is of corn, and Felicidad'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 com. 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 produce millon pairs per week, and the country that produces corn will produce million bushels per week In the following table, enter each country's production decision on the third row of the table (marked Production 23 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 14 million pairs of jeans to the other country in exchange for 42 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 18 million pairs per week, and the total production of corn was 52 millon bushels per week. Because of specialization, the total production of jeans has increased by million pairs per week, and the total production of corn has increased by million 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 table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption) Contente Jeans Corn (Millions of pairs) (Millions of bushels) Felicidad Jeans Corn (Millions of pairs) (Millions of bushels) 6 36 12 16 Without Trade Production Consumption with Trade 6 36 12 16 Production Trade action Consumption 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"), Contente Jeans Corn (Millions of pairs) (Millions of bushels) Felicidad Jeans Corn (Millions of pairs) (Millions of bushels) 6 36 12 16 6 36 12 16 Without Trade Production Consumption With Trade Production Trade action Consumption Gains from Trade Increase in Consumption
