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?
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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