Gains from trade

Consider two neighboring island countries called Bellissima and Dolorium. 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.

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

Bellissima. 12. 24

Dolorium 8. 32

Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Dolorium uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Bellissima produces 12 million bushels of rye and 72 million pairs of jeans, and Dolorium produces 24 million bushels of rye and 32 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 ____ pairsof jeans, and Dolorium's opportunity cost of producing 1 bushel of rye is ____pairs of jeans. Therefore, ______ has a comparative advantage in the production of rye, 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 rye 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 rye trades 26 million bushels of rye 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 rye 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 rye has increased by _____ millionbushels per month, and the total production of jeans has increased by ____ millionpairs per month.

Because the two countries produce more rye 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").

Bellissima Dolorium

Rye Jeans Rye Jeans

(Millions of bushels) (Millions of pairs) (Millions of bushels) (Millions of pairs)

Without Trade

Production. 12 72 24 32

Consumption 12 72 24 32

With Trade

Production. ____. _____. ______. ______

Trade action Import/Exports (26 or 78) Import/Export (26 or 78) Import/Export (26 or 78) Import/Exports (26 or 78)

Consumption. _____. _____. ______. ______

Gains from Trade

Increase in Consumption _____ _____ ______ ______