Gains from trade

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

Country Jeans Corn

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

Contente 8 16

Euphoria 5 20

Initially, suppose Contente uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn, while Euphoria uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Contente 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.

Contente's opportunity cost of producing 1 pair of jeans is_________of corn, and Euphoria's opportunity cost of producing 1 pair of jeans is____________of corn. Therefore, _______has a comparative advantage in the production of jeans, and 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 month, and the country that produces corn will produce________millionbushels 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 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 month, and the total production of corn was 68 million bushels per month. Because of specialization, the total production of jeans has increased by_______millionpairs per month, and the total production of corn has increased by________millionbushels per month.

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").

Contente Euphoria

Jeans (Mills of pairs) Corn(Mills of bushels) Jeans (Mill of pairs) Corn(Mill of bushels)

Prod 8 48 15 20

Consum 8 48 15 20

With Trade

Prod _____ ____ _____ _____

Trade act ______ _____ ________ ________

Consum ________ ______ ________ _________

Gains from Trade

Increased

Consumption _____ _______ _________ ________