Question

Consider two neighboring island countries called Felicidad and Bellissima. 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)
Felicidad 8 32
Bellissima 12 24
Initially, suppose Bellissima uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn while Felicidad uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Felicidad produces 24 million pairs of jeans and 32 million bushels of corn, and Bellissima produces 12 million pairs of jeans and 72 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.
Felicidad's opportunity cost of producing 1 pair of jeans is (1/2 bushel, 1/4 bushel, 2 bushel, 4 bushel) of corn, and Bellissima's opportunity cost of producing 1 pair of jeans is (1/2 bushel, 1/4 bushel, 2 bushel, 4 bushel) of corn. Therefore, (Bellissima, Felicidad) has a comparative advantage in the production of jeans, and (Bellissima, Felicidad) 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, producing only that good. In this case, the country that produces jeans will produce ______million pairs per month, and the country that produces corn will produce_________million bushels 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 26 million pairs of jeans to the other country in exchange for 78 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 36 million pairs per month, and the total production of corn was 104 million bushels per month. Because of specialization, the total production of jeans has increased by________million pairs per month, and the total production of corn has increased by________million bushels 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 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").

Answer 1

Bellisima's opportunity cost:

• Production of corn per million hours of labor = 12 / 24 = 0.5 pairs of jeans of corn
• Production of jeans per million hours of labor = 24 / 12 = 2 bushels of corn

Felicidad's opportunity cost:

• Production of corn per million hours of labor = 8 / 32 = 0.25 pairs of jeans of corn
• Production of jeans per million hours of labor = 32 / 8 = 4 bushels of corn

Felicidad has a comparative advantage int he production of corn while Bellisima has a comparative advantage in the production of jeans.

If both countries specialize:

• Felicidad will produce 128 million bushels of corn.
• Bellisima will produce 48 million pairs of jeans.

Total production of corn has increased by 24 million bushels.

Total production of jeans has increased by 12 million pairs.

Assuming that Bellisima trades 26 million pairs of jeans and Felicidad exchanges 78 million bushels of corn, then:

• Felicidad's consumption of jeans will increase by 2 million pairs, while their consumption of corn will increase by 50 million bushels.
• Bellisima's consumption of jeans will increase by 10 million pairs, while their consumption of corn will increase by 6 million bushels.