3. Gains from trade

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 corn, jeans, or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor.

Country	Corn	Jeans
(Bushels per hour of labor)	(Pairs per hour of labor)
Euphoria	8	32
Bellissima	12	24

Initially, suppose Bellissima uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans, while Euphoria uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Euphoria produces 24 million bushels of corn and 32 million pairs of jeans, and Bellissima produces 12 million bushels of corn and 72 million pairs of jeans. 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 corn and jeans it produces.

Euphoria's opportunity cost of producing 1 bushel of corn is of jeans, and Bellissima's opportunity cost of producing 1 bushel of corn is of jeans. Therefore, has a comparative advantage in the production of corn, and has a comparative advantage in the production of jeans.

Suppose that each country completely specializes in the production of the good in which it has a comparative advantage, producing onlythat good. In this case, the country that produces corn will produce

millionbushels per month, and the country that produces jeans will produce

millionpairs 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 corn trades 26 million bushels of corn to the other country in exchange for 78 million pairs of jeans.

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 corn was 36 million bushels per month, and the total production of jeans was 104 million pairs per month. Because of specialization, the total production of corn has increased by

millionbushels per month, and the total production of jeans has increased by

millionpairs per month.

Because the two countries produce more corn and more jeans 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").

	Euphoria	Bellissima
Corn	Jeans	Corn	Jeans
(Millions of bushels)	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)
Without Trade
Production	24	32	12	72
Consumption	24	32	12	72
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption

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