Question

The following two tables are hypothetical production possibilities tables for two countries/economies, Springland and Summerland, and indicate output per year.  Assume that initially there is autarky.  

Springland’s Production Possibilities Table (in millions)

	A	B	C	D
Umbrellas (U)	60	40	20	0
Pairs of sandals (S)	0	10	20	30

Summerland’s Production Possibilities Table (in millions)

	M	N	O	P
Umbrellas (U)	30	20	10	0
Pairs of sandals (S)	0	20	40	60

Assume that initially, with autarky, Springland is producing at point B on its PPC, and Summerland is producing at point N on its PPC.  Then, international trade begins and each country specializes in the good for which it has comparative advantage.  The terms of trade they both agree to are: 1 umbrellas = 1 pair of sandals. Note that Summerland’s net gain of pairs of sandals from specialization and trade is 20 million pairs of sandals.

Using the above information, complete the below table, where U = 1 million umbrellas and S = 1 million pairs of sandals, filling in your final, complete answer in the blank provided to the left of U or S. Do not show your work.

Answer 1

Springland's opportunity cost for producing umbrellas = 30/60= 0.5 pairs of sandals.

Summerland's opportunity cost for producing umbrellas = 60/30= 2 pairs of sandals.

Because Springland has a lower opportunity cost for producing umbrellas, therefore Springland has a comparative advantage in producing umbrellas and would be completely specializes in producing umbrellas. And Summerland has a comparative advantage in producing sandals and would be completely specialize in producing sandals.

Before trade : Springland produces at point B , that is 40 U and 10 S.

And Summerland produces at point N , that is 20 U and 20 S.

After trade : Springland produces 60 U and 0 S.

And Summerland produces 0 U and 60 S.

It is given that Summerland net gain from specialization and trade is 20 million pairs of sandals. Therefore, the difference between output available after trade and output before specialization should be such that we get 20 S in the gain from specialization. As Summerland export 20 S and import 20 U , then , it would be possible. (Because terms of trade is 1 umbrella= 1 pair of sandals ), therefore for 20 pairs of sandals = 20 umbrellas.

	Output before specialization	Output after specialization	Exports (-) and imports (+)	Outputs available after trade	Gains from specialization and trade
Springland	40 U 10 S	60 U 0 S	-20 U +20 S	(60-20)=40U 20 S	(40-40)= 0U (20-10)= 10 S
Summerland	20U 20 S	0 U 60 S	+20 U -20 S	20 U (60-20)=40 S	(20-20)U= 0 U (40-20)S = 20 S
Total	(40+20)=60 U (10+20)= 30 S	60 U 60S		(40+20)=60U (20+40)=60S	0 U (10+20)=30 S