Question

Econ Land and the Republic of Trade produce spectacular corn and ridiculously fast phones as shown...

Econ Land and the Republic of Trade produce spectacular corn and ridiculously fast phones as shown below.

Phones/1 hour

Bushels of Corn/1 hour

Econ Land

10

40

Republic of Trade

20

60

Assume that before trade Econ Land is currently producing 5 ridiculously fast phones and 20 bushels of spectacular corn, while the Republic of Trade is currently producing 14 ridiculously fast phones and 18 bushels of spectacular corn.

Suppose that instead of producing these amounts, Econ Land and the Republic of Trade specialize and then trade 19 bushels of corn in exchange for 5 phones. What do the two nations each gain from this trade?

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Answer #1

OC of producing phones

for econ land = 40/10 = 4 corn and for republic = 60/20 = 3 corn

OC of producing corn

for econ = 10/40 = 0.25 phone and for republic = 20/60 = 0.33 phone

So, Econ has a comparative advantage in producing corn and Republic has a comparative advantage in producing phones

After the specialization, Econ will produce 40 corn and Republic will produce 20 phones

Econ will export 19 corn in exchange for 5 phones and Republic will export 5 phones in exchange for 19 corn

Econ will gain (40-19)-20 = 21 - 20 = 1 corn and 5 phones

Republic will gain (20-5)-14 = 1 phone and 19 corn

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