3. Gains from trade

Consider two neighboring island countries called Bellissima and Felicidad. They each have 4 million labor hours available per month 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.

CountryRyeJeans(Bushels per hour of labor)(Pairs per hour of labor)Bellissima816Felicidad520Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Felicidad uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Bellissima produces 8 million bushels of rye and 48 million pairs of jeans, and Felicidad produces 15 million bushels of rye and 20 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 rye and jeans it produces.

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