Question

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

Corn Jeans
Country (Bushels per hour of labor) (Pairs per hour of labor)
Euphoria 4 16
Contente 6 12
Initially, suppose Contente uses 1 million hours of labor per week to produce corn and 3 million hours per week to produce jeans while Euphoria uses 3 million hours of labor per week to produce corn and 1 million hours per week to produce jeans. Consequently, Euphoria produces 12 million bushels of corn and 16 million pairs of jeans, and Contente produces 6 million bushels of corn and 36 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 is1/4 pair of jeans, and Contente's opportunity cost of producing 1 bushel of corn is1/2 pair of jeans. Therefore,Contente has a comparative advantage in the production of corn, andEuphoria 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 only that good. In this case, the country that produces corn will producemillion bushels per week, and the country that produces jeans will producemillion pairs per week.
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 14 million bushels of corn to the other country in exchange for 42 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 18 million bushels per week, and the total production of jeans was 52 million pairs per week. Because of specialization, the total production of corn has increased bymillion bushels per week, and the total production of jeans has increased bymillion pairs per week.
Because the two countries produce more corn and more jeans under specialization, each country is able to gain from trade.
Calculate the gains from trade—that 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 Contente
Corn Jeans Corn Jeans
(Millions of (Millions of (Millions of (Millions of
bushels) pairs) bushels) pairs)
Without trade
Production 12 16 6 36
Consumption 12 16 6 36
With trade
Production
Trade action
Consumption
Gains from trade
Increase in consumption

Answer 1

Euphoria produces 12 million bushels of corn and 16 million pairs of jeans

Euphoria's opportunity cost of producing 1 bushel of corn is 1/4 pair of jeans

Euphoria's opportunity cost of producing 1 pair of jeans is 4 bushels of corn

Euphoria will produce only jeans, total production 64 million pairs of jeans. The total production of jeans between the two countries increased by 12 million per week.

Contente produces 6 million bushels of corn and 36 million pairs of jeans

Contente's opportunity cost of producing 1 bushel of corn is 1/2 pair of jeans

Contente's opportunity cost of producing 1 pair of jeans is 1/2 bushels of corn

Contente will produce only corn, total production 24 million bushels.

The total production of corn between the two countries increased by 6 million bushels.

Contente trades 14 million bushels of corn for 42 million pairs of jeans from Euphoria:

• Contente's gain = 42 - (14 x 1/2 = 7) = 35 million pairs of jeans
• Euphoria's gain = 14 - (42 x 1/4 = 10.5) = 3.5 million bushels of corn

Consumption with or without trade:

• Contente ⇒ with trade 10 million bushels of corn and 42 million pairs of jeans. Without trade 6 million bushels of corn and 36 million pairs of jeans. Total gain = 4 million bushels of corn and 6 million pairs of jeans.
• Euphoria ⇒ with trade 14 million bushels of corn and 22 million pairs of jeans. Without trade 12 million bushels of corn and 16 million pairs of jeans. Total gain = 2 million bushels of corn and 6 million pairs of jeans.