Question

Consider two neighboring island countries called Arcadia and Dolorium. They each have 4 million labor hours available per month 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)
Arcadia	12	24
Dolorium	8	32

Initially, suppose Arcadia uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans, while Dolorium uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently, Arcadia produces 12 million bushels of corn and 72 million pairs of jeans, and Dolorium produces 24 million bushels of corn and 32 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.

Arcadia's opportunity cost of producing 1 bushel of corn is _____ of jeans, and Dolorium's opportunity cost of producing 1 bushel of corn is _____ of jeans. Therefore, ______ has a comparative advantage in the production of corn, and _______ 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 month, and the country that produces jeans will produce ________ million pairs 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 corn trades 26 million bushels of corn to the other country in exchange for 78 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 36 million bushels per month, and the total production of jeans was 104 million pairs per month. Because of specialization, the total production of corn has increased by _____ million bushels per month, and the total production of jeans has increased by _____ million pairs per month.

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").

	Arcadia		Dolorium
	Corn	Jeans	Corn	Jeans
	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)
Without Trade
Production	12	72	24	32
Consumption	12	72	24	32
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption

Answer 1

Arcadia's opportunity cost of producing 12 bushels of corn is 24 pairs of jeans. Either of the goods could produced because of limited resources. So Arcadia'' opportunity cost of producing 1 bushel of corn is 24/12 or 2 pairs of jeans, and

Dolorium's opportunity cost of producing 8 bushel of corn is 32 pairs of jeans. So Dolorium's opportunity cost to produce 1 bushel of corn is 32/8 or 4 pairs of jeans.

The country with lesser opportunity cost would have the comparative advantage in the production of that good.

Therefore, Arcadia has a comparative advantage in the production of corn, and Dolorium has a comparative advantage in the production of jeans since Dolorium sacrifices 1/4th bushel of corn and Arcadia 1/2 th bushel 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 corn will use all the labour in the production of corn and produce 12*4million hours of labour = 48 million bushels per month, and the country that produces jeans will produce 32*4=128 million pairs per month.

Since both of them were using only 1 million hours of labour in the good in which it has comparative advantage, so when using all of the labour hours available, it would be multiplied by 4 million labour hours as shown above.

When the two countries did not specialize, the total production of corn was 36 million bushels per month, and the total production of jeans was 104 million pairs per month. Because of specialization, the total production of corn has increased by (48-36)=12 million bushels per month, and the total production of jeans has increased by (128-104)=24 millio pairs per month.

We are given the country that produces corn trades 26 million bushels of corn to the other country in exchange for 78 million pairs of jeans.

	Arcadia (Bushels of corns in million)	Arcadia (Jeans in million pairs)	Dolorium (Bushels of corn in millions)	Dolorium (pair of jeans in millions)
Without trade
Production	12	72	24	32
Consumption	12	72	24	32
With trade
Production	48	-	-	128
Trade action	Export	import	import	Export
Consumption	22	78	26	50
Gains from trade Increase in consumption	10	6	2	18

So from the table it is clear that there has been an increase in overall production and consumption of corn and jeans in both the countries due to trading.

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