Consider two neighboring island countries called Contente and Felicidad. They each have 4 million labor hours available per week 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)
Contente 12 24
Felicidad 8 32
Initially, suppose Contente uses 1 million hours of labor per week to produce jeans and 3 million hours per week to produce rye, while Felicidad uses 3 million hours of labor per week to produce jeans and 1 million hours per week to produce rye. Consequently, Felicidad produces 12 million pairs of jeans and 16 million bushels of rye, and Contente produces 6 million pairs of jeans and 36 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.
Felicidad's opportunity cost of producing 1 bushel of corn isof jeans, and Contente's opportunity cost of producing 1 bushel of corn isof jeans. Therefore, has a comparative advantage in the production of corn, andhas 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 week, and the country that produces jeans will producemillion pairs 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 rye trades 26 million bushels of rye 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 rye was 36 million bushels per week, and the total production of jeans was 104 million pairs per week. Because of specialization, the total production of rye has increased by million bushels per week, and the total production of jeans has increased by million pairs per week.
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").
Contente Felicidad
Rye Jeans Rye Jeans
(Millions of (Millions of (Millions of (Millions of
bushels) pairs) bushels) 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
a. Exports 26 / Imports 26.
b. Exports 78/ Imports 78.
c. Exports 26/ Imports 26.
d. Exports 78/ Imports 78.