3. Gains from trade

Suppose there exist two imaginary countries, Congaree and Denali. Their labor forces are each capable of supplying four million hours per day that can be used to produce chinos, pistachios, or some combination of the two. The following table shows the amount of chinos or pistachios that can be produced by one hour of labor.

Country	Chinos	Pistachios
(Pairs per hour of labor)	(Pounds per hour of labor)
Congaree	4	16
Denali	6	12

Suppose that initially Denali uses 1 million hours of labor per day to produce chinos and 3 million hours per day to produce pistachios, while Congaree uses 3 million hours of labor per day to produce chinos and 1 million hours per day to produce pistachios. As a result, Congaree produces 12 million pairs of chinos and 16 million pounds of pistachios, and Denali produces 6 million pairs of chinos and 36 million pounds of pistachios. Assume there are no other countries willing to engage in trade, so, in the absence of trade between these two countries, each country consumes the amount of chinos and pistachios it produces.

Congaree's opportunity cost of producing 1 pair of chinos is2 pounds of pistachios, and Denali's opportunity cost of producing 1 pair of chinos is4 pounds of pistachios. Therefore,Congaree has a comparative advantage in the production of chinos, andDenali has a comparative advantage in the production of pistachios.

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 chinos will produce

millionpairs per day, and the country that produces pistachios will produce

millionpounds per day.

In the following table, enter each country's production decision on the third row of the table (marked "Production").

Suppose the country that produces chinos trades 14 million pairs of chinos to the other country in exchange for 42 million pounds of pistachios.

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 chinos was 18 million pairs per day, and the total production of pistachios was 52 million pounds per day. Because of specialization, the total production of chinos has increased by

millionpairs per day, and the total production of pistachios has increased by

millionpounds per day.

Because the two countries produce more chinos and more pistachios 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").

	Congaree	Denali
Chinos	Pistachios	Chinos	Pistachios
(Millions of pairs)	(Millions of pounds)	(Millions of pairs)	(Millions of pounds)
Without Trade
Production	12	16	6	36
Consumption	12	16	6	36
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption