3. Gains from trade

Consider two neighboring island countries called Bellissima and Euphoria. 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.

Jeans Corn

Country (Pairs per hour of labor). (Bushels per hour of labor)

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Bellissima 8 16

Euphoria 5 20

Initially, suppose Bellissima uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce corn, while Euphoria uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce corn. Consequently, Bellissima produces 8 million pairs of jeans and 48 million bushels of corn, and Euphoria produces 15 million pairs of jeans and 20 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.

Bellissima's opportunity cost of producing 1 pair of jeans is (1/2 bushel, 1/4 bushel, 2 bushels, or 4 bushels)of corn, and Euphoria's opportunity cost of producing 1 pair of jeans is(1/2 bushel, 1/4 bushel, 2 bushels, or 4 bushels) of corn. Therefore,(Euphoria or Bellissima)has a comparative advantage in the production of jeans, and(Euphoria or Bellissima) 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, producingonlythat good. In this case, the country that produces jeans will produce ________ millionpairs per week, and the country that produces corn will produce _______ millionbushels per week.

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 week, and the total production of corn was 68 million bushels per week. Because of specialization, the total production of jeans has increased by ________ millionpairs per week, and the total production of corn has increased by ________ millionbushels 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 tradethat 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").

Trade Action Drop down options: export or import 18 export or import 54 export or import 18 export or import 54