Question

Consider two neighboring island countries called Dolorium and Arcadia. 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.

Country	Corn	Jeans
	(Bushels per hour of labor)	(Pairs per hour of labor)
Dolorium	5	20
Arcadia	8	16

Initially, suppose Arcadia uses 1 million hours of labor per week to produce corn and 3 million hours per week to produce jeans, while Dolorium uses 3 million hours of labor per week to produce corn and 1 million hours per week to produce jeans. Consequently, Dolorium produces 15 million bushels of corn and 20 million pairs of jeans, and Arcadia produces 8 million bushels of corn and 48 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.

Dolorium's opportunity cost of producing 1 bushel of corn is................( 1/2, 1/4, 2, 4) pair of jeans, and Arcadia's opportunity cost of producing 1 bushel of corn is........( 1/2, 1/4, 2, 4) pair of jeans. Therefore,.................( Arcadia/ Dolorium) has a comparative advantage in the production of corn, and...................( Arcadia/ Dolorium) 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 produce..........................million bushels per week, and the country that produces jeans will produce..................million 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 18 million bushels of corn to the other country in exchange for 54 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 23 million bushels per week, and the total production of jeans was 68 million pairs per week. Because of specialization, the total production of corn has increased by................million bushels per week, and the total production of jeans has increased by.................million 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”).

	Dolorium		Arcadia
	Corn	Jeans	Corn	Jeans
	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)
Without Trade
Production	15	20	8	48
Consumption	15	20	8	48
With Trade
Production	............................	............................	.......................	............................
Trade action	18 Exports/Emports	54 Exports/Emports	18 Exports/Emports	54 exports/emports
Consumption	..............................	.............................	..........................	.......................
Gains from Trade
Increase in Consumption	.............................	............................	..........................	.................................

Answer 1

Dolorium's opportunity cost of producing 1 bushel of corn is 20/5=4 pairs of jeans and Arcadia's opportunity cost of producing 1 bushel of corn is 16/8=2 pairs of jeans. Because Arcadia has a lower opportunity cost for the production of corn. Therefore, Arcadia has a comparative advantage in the production of corn and Dolorium 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 i.e Arcadia will produce (4)(8) = 32 million bushels per week And the country that produces jeans i.e Dolorium will produce 4(20)=80 million pairs per week.

Suppose the country that produces corn trades 18 million bushels of corn to the other country in exchange for 54 million pairs of jeans.

		DOLORIUM		ARCADIA
		Corn (milions of bushels)	Jeans (Millions of pairs)	Corn (Millions of bushels)	Jeans (Millions of pairs)
Without trade	Production	15	20	8	48
	Consumption	15	20	8	48
With Trade	Production	0	80	32	0
	Trade action	Import 18	Export 54	Export 18	Import 54
	Consumption	18	(80-54)=26	(32-18)=14	54
Gains from trade	Increase in consumption	(18-15)=3	(26-20)=6	(14-8)=6	(54-48)=6

When the two countries did not specialize ,the total production of corn was 23 million bushels per week and the total production of jeans was 68  millions pairs per week. Because of specialization ,the total production of corn was 32 million bushels per week and total production of jeans was 80 million pairs per week. This implies that because of specialization , total production of corn has increased by (32-23)=9 million bushels per week and total production of jeans has increased by (80-68)=12 million pairs per week.