Question

Consider two neighboring island countries called Bellissima and Dolorium. They each have 4 million labor hours available per month that they can use to produce rye, jeans, or a combination of both. The following table shows the amount of rye or jeans that can be produced using 1 hour of labor.

Country	Rye	Jeans
	(Bushels per hour of labor)	(Pairs per hour of labor)
Bellissima	8	16
Dolorium	5	20

Initially, suppose Bellissima uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Dolorium uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Bellissima produces 8 million bushels of rye and 48 million pairs of jeans, and Dolorium produces 15 million bushels of rye and 20 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 rye and jeans it produces.

Bellissima's opportunity cost of producing 1 bushel of rye is2 pairs of jeans, and Dolorium's opportunity cost of producing 1 bushel of rye is4 pairs of jeans. Therefore,Dolorium has a comparative advantage in the production of rye, andBellissima 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 rye 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 rye trades 18 million bushels of rye 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 rye was 23 million bushels per month, and the total production of jeans was 68 million pairs per month. Because of specialization, the total production of rye 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 rye 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").

	Bellissima		Dolorium
	Rye	Jeans	Rye	Jeans
	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)
Without Trade
Production	8	48	15	20
Consumption	8	48	15	20
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption

Grade It

Answer 1

Bellissima opportunity cost of producing rye = 16/8 pairs of jeans= 2 pairs of jeans.

Similarly, Dolorium opportunity cost of producing rye = 20/5 pairs of jeans = 4 pairs of jeans.

Because Bellissima has a lower opportunity cost in producing rye , therefore Bellissima has a comparative advantage in producing rye.

And Bellissima opportunity cost of producing jeans = 8/16 bushels of rye = 1/2 bushels of rye.

Similarly, Dolorium opportunity cost of producing jeans = 5/20 bushels of rye = 1/4 bushels of rye.

Because Dolorium has a lower opportunity cost in producing jeans , therefore, Dolorium has a comparative advantage in producing jeans.

Now, the country who has the comparative in producing rye i.e Bellissima will produce (8)(4) = 32 million bushels of rye. And the country who has the comparative advantage in producing jeans (specilaise in it) i.e Dolorium will produce = (20)(4) = 80 million pairs of jeans.

Suppose the country that produces rye trades 18 million bushels of rye to the other country in exchange for 54 million pairs of jeans. Now, put all these information in the following table, we get:

		BELLISSIME		DOLORIUM
		Rye (millions of bushels)	Jeans (Millions of pairs)	Rye (millions of bushels )	Jeans (millions of pairs)
Without trade	Production	8	48	15	20
	Consumption	8	48	15	20
With Trade	Production	32	0	0	80
	Trade	Exports 18	Imports 54	Imports 18	Exports 54
	Consumption	(32-18) = 14	54	18	(80-54) =26
Gains from Trade	Increase in consumption	(14-8) =6	(54-48)=6	(18-15) =3	(26-20)=6

When the two countries did not specalize , the total production of rye was (8+15) = 23 million bushels of rye. And the total production of jeans (48 + 20) = 68 million pairs of jeans.

Because of specialisation , after trade :total production of rye is equal to 32 million bushels of rye and total prodyction of jeans = 80 million pairs of jeans.

It implies that total production of rye has increased by (32-23) = 9 million bushels of rye. And the total production of jeans has increased by (80-68) = 12 million pairs of jeans.

So, overall both countries gains from trade.