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.

(1)

Output before specialization

(2)

Output after specialization

(3) exports (-)

and

imports (+)

(4)

Outputs available after trade

(5)

Gains from specialization and trade

Springland

_40___ U

_10___S

___60_ U

_30___S

-20____ U

__+20__S

____ U

____S

____ U

____S

Summerland

___20_ U

20____S

__30__ U

__60__S

_+10___ U

___+40__S

____ U

____S

____ U

_20___S

Total

_60___ U

30____S

__90__ U

__90__S

____ U

____S

____ U

___S

Answer 1

In the diagram below, we have roughly plotted the points on the PPFs for each country :

Here, under autarky (points B and N), total production of umbrellas = 60 and total production of pair of sandals = 30

Now, opportunity cost of producing umbrellas in Springland = pairs of sandals sacrificed/units of umbrellas produced = 30/60 = 0.5

and opportunity cost of producing umbrellas in Summerland = pairs of sandals sacrificed/units of umbrellas produced = 60/30 = 2

As opportunity cost of producing umbrellas is lower for Springland, Springland has comparative advantage in the production of umbrellas.

Similarly, opportunity cost of producing pair of sandals in Springland = units of umbrellas sacrificed/pairs of sandals produced = 60/30 = 2

and opportunity cost of producing pairs of sandals in Summerland = units of umbrellas sacrificed/pairs of sandals produced = 30/60 = 0.5

As opportunity cost of producing pair of sandals is lower for Summerland, Summerland has comparative advantage in the production of pair of sandals.

With specialization, Springland will produce 60 umbrellas whereas, Summerland will produce 60 pair of sandals.

Now, terms of trade is : 1 umbrella = 1 pair of sandals

Then, if Springland consumes 40 umbrellas, it can export remaining 20 umbrellas (out of 60 umbrellas) to Summerland, for which it will get 20 pair of sandals in exchange (point B') (gain of 20-10 = 10 pair of sandals from trade).

Similarly, if Summerland consumes 20 pair of sandals, it can export remaining 40 pair of sandals (out of 60 pair of sandals) to Springland, for which it will get 40 umbrellas in exchange (point N') (gain of 40-20 = 20 pair of umbrellas from trade).

1) Output before specialization :

Springland : 40 umbrellas and 10 pairs of sandals (point B)

Summerland : 20 umbrellas and 20 pairs of sandals (point N)

Total output = 60 umbrellas and 30 pair of sandals

2) Output after specialization :

Springland : 60 umbrellas and 0 pairs of sandals (point A)

Summerland : 0 umbrellas and 60 pairs of sandals (point P)

Total output = 60 umbrellas and 60 pair of sandals

3) Exports and imports :

Springland : export 20 (-) umbrellas and import 20 (+) pairs of sandals

Summerland : export 40 (-) pairs of sandals and import 40 (+) umbrellas

4) Output available after trade :

Springland : 40 umbrellas and 20 pairs of sandals (point B')

Summerland : 40 umbrellas and 20 pairs of sandals (point N')

Total output : 80 umbrellas and 40 pair of sandals

5) Gains from specialization and trade:

Springland : 0 umbrellas and 10 pair of sandals

Summerland : 20 umbrellas and 0 pair of sandals

Total/Net gain : 20 umbrellas and 10 pair of sandals