Question

3. Gains from trade - WHEN ANSWERING THE QUESTION CAN YOU PLEASE EXPLAIN HOW YOU CAME UP WITH THE NUMBERS FOR EACH PART THANK YOU!

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

Country	Jeans	Rye
	(Pairs per hour of labor)	(Bushels per hour of labor)
Contente	6	12
Dolorium	4	16

Initially, suppose Contente uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce rye, while Dolorium uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce rye. Consequently, Contente produces 6 million pairs of jeans and 36 million bushels of rye, and Dolorium produces 12 million pairs of jeans and 16 million bushels of rye. 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 jeans and rye it produces.

Contente's opportunity cost of producing 1 pair of jeans is (1/2, 1/4, 2, or 4 bushels?) of rye, and Dolorium's opportunity cost of producing 1 pair of jeans is (1/2, 1/4, 2, or 4) of rye. Therefore, (Dorlorium, Contente) has a comparative advantage in the production of jeans, and (Dorlorium, Contente) has a comparative advantage in the production of rye.

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 jeans will produce (______) million pairs per week, and the country that produces rye will produce (________ ) million bushels 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 jeans trades 14 million pairs of jeans to the other country in exchange for 42 million bushels of rye.

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 jeans was 18 million pairs per week, and the total production of rye was 52 million bushels per week. Because of specialization, the total production of jeans has increased by (_____) million pairs per week, and the total production of rye has increased by (_____) million bushels per week.

Because the two countries produce more jeans and more rye 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").

	Contente		Dolorium
	Jeans	Rye	Jeans	Rye
	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)
Without Trade
Production	6	36	12	16
Consumption	6	36	12	16
With Trade
Production	____	_____	_____	______
Trade action	(exports 14/import 14)	export 42/import 42)	(export 14/import 14)	(export 42/import 42)
Consumption	_____	_______	________	_________
Gains from Trade
Increase in Consumption	______	_______	________	__________

Answer 1

Contente:

6 pairs of Jeans = 12 bushels of Rye

1 pair of Jeans = 12/6 = 2 bushels of Rye

Opportunity cost of producing 1 pair of jeans is 2 bushels of Rye.

Dolorium:

4 pairs of Jeans = 16 bushels of Rye

1 pair of Jeans = 16/4 = 4 bushels of Rye

Opportunity cost of producing 1 pair of jeans is 4 bushels of Rye

A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

Opportunity cost of producing 1 pair of jeans is lower in Contente so, Contente has a comparative advantage in Jeans and Dolorium has a comparative advantage in Rye.

When Contente uses 4 million hours of labor to produce Jeans then it is able to produce 4 million X 6 = 24 million pair of jeans

When Euphoria uses 4 million hours of labor to produce Rye then it is able to produce 4 million X 16 = 64 million bushels of rye

Total production of jeans increases by 24 million - 18 million = 6 million

Total production of rye increases by 64 million - 52 million = 12 million