Question

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

Country	Jeans	Corn
	(Pairs per hour of labor)	(Bushels per hour of labor)
Bellissima	5	10
Felicidad	4	16

Initially, suppose Bellissima uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn, while Felicidad uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Bellissima produces 5 million pairs of jeans and 30 million bushels of corn, and Felicidad produces 12 million pairs of jeans and 16 million bushels of corn. 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 corn it produces.

Bellissima's opportunity cost of producing 1 pair of jeans is2 bushels   of corn, and Felicidad's opportunity cost of producing 1 pair of jeans is4 bushels   of corn. Therefore,   has a comparative advantage in the production of jeans, and   has a comparative advantage in the production 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 jeans will produce

million pairs per month, and the country that produces corn will produce

million bushels 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 jeans trades 13 million pairs of jeans to the other country in exchange for 39 million bushels of corn.

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 17 million pairs per month, and the total production of corn was 46 million bushels per month. Because of specialization, the total production of jeans has increased by

million pairs per month, and the total production of corn has increased by

million bushels per month.

Because the two countries produce more jeans and more corn 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		Felicidad
	Jeans	Corn	Jeans	Corn
	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)
Without Trade
Production	5	30	12	16
Consumption	5	30	12	16
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption

Answer 1

Bellissima's opportunity cost of producing 1 pair of jeans is 2 bushels of corn (=10/5), and Felicidad's opportunity cost of producing 1 pair of jeans is 4 bushels of corn (=16/4). Therefore, Bellissima has a comparative advantage in the production of jeans (lower opportunity cost), and Felicidad has a comparative advantage in the production of corn.

Complete specialization:

Jeans produced = 5 x 4 = 20 mn pairs

Corn produced = 16 x 4 = 64 mn bushels

Because of specialization, the total production of jeans has increased by = 20 - 17 = 3 mn pairs

and the total production of corn has increased by = 64 - 46 = 18 million bushels

	Bellissima		Felicidad
	Jeans	Corn	Jeans	Corn
	(Millions of pairs)	(Millions of bushels)	(Millions of pairs)	(Millions of bushels)
Without Trade
Production	5	30	12	16
Consumption	5	30	12	16
With Trade
Production	20	0	0	64
Trade action	export 13	import 39	import 13	export 39
Consumption	7	39	13	25
Gains from Trade
Increase in Consumption	2	9	1	9