courses apliacom 3 Gains from trade Consider two neighboring

courses aplia.com 3. Gains from trade Consider two neighboring isliand countries called Arcadia produce rye, jeans, and Dolonium. They each have 4 milion laber hours available per month that they can use to c or a combination of both. The following table shows the amount of rye or yeans that can be of rye or jeans that can be produced using I hour of labor eans Country (ushels per hour of labor) (Pairs per hour of labor) Arcadia Dolorium 20 Initiaty, suppose Arcadia uses i million hours of labor per month to produce rye and 3 million hours per month to produce yeans while Dolorium 3 miltion hours of labor per month to produce rye and 1 milion hours per month to produce jeans. Consequently, Arcada produces is millon bushels of rye and 48 mition pairs of jeans, and Dolonium produces 15 million bushels of rye and 20 million pairs of jeans. Assume there are no other ceuntries 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 Arcadia\'s opportunity cost of producing I bushel of rye isof eans, and Dolorium\'s opportunity cost of producing 1 bushel of rye ts and of jeans. Therefore, ha.. comparative advantage the production of rye, advantage in tbe production of jeans. \'werprative advantage, producne ery tha, pod h Suppose that each country completely leeciaizes in thproducton of the good in-hich this case, the country that produces rye will produce million busheis per month, and the country that produces jeans wil preduce In the following table, enter each country\'s produotion decision on the thind rew of the tabie (marked \"Predluctrion\"), Suppose the country that produces rye tradies 18 millon bushes of rye to the other country in eschange for s4 mlion pairs of jeans In the following table, select the amoune of each good that each ceuntry exports and imports in the boxes across the row marked \"Thade Actos, and of each good on the ine

Solution

Arcadia can produce either 8 bushels of Rye or 16 pairs of jeans using 1 hour of labor. So, Arcadia’s opportunity cost of producing 1 bushel of Rye is 2 (16/8) pairs of jeans while opportunity cost of producing 1 pair of jeans is 0.5 (8/16) bushels of Rye.

Dolorium can produce either 5 bushels of Rye or 20 pairs of jeans using 1 hour of labor. So, Dolorium’s opportunity cost of producing 1 bushel of Rye is 4 (20/5) pairs of jeans while opportunity cost of producing 1 pair of jeans is 0.25 (5/20) bushels of Rye.

Arcadia can produce Rye at lower opportunity cost in comparison to Dolorium therefore it has comparative advantage in production of Rye while Dolorium can produce jeans at lower opportunity cost in comparison to Arcadia therefore it has comparative advantage in production of jeans.

Thus,

Arcadia’s opportunity cost of producing 1 bushel of rye is 2 pairs of jeans, and Dolorium’s opportunity cost of producing 1 bushel of rye is 4 pairs of jeans. Therefore, Arcadia has a comparative advantage in the production of rye and Dolorium has a comparative advantage in the production of jeans.

If each country specializes in production of the good in which it has comparative advantage then Arcadia will specialize in production of rye as it has comparative advantage in production of rye while Dolorium will specialize in production of jeans as it has comparative advantage in production of jeans.

Arcadia can produce 8 bushels of rye per hour of labor. With 4 million labor hours available, it will be able to produce 32 million bushels of rye per month.

Dolorium can produce 20 pairs of jeans per hour of labor. With 4 million labor hours available, it will be able to produce 80 million pairs of jeans per month.

Thus,

The country that produces rye will produce 32 million bushels per month, and the country that produces jeans will produce 80 million pairs per month.

Countries decide to trade 18 million bushels of rye for 54 million pairs of jeans.

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. After specialization, the total production of rye was 32 million bushels per month, and the total production of jeans was 80 million pairs of jeans.

Because of specialization, the total production of rye has increased by 9 million bushels per month, and the total production of jeans has increased by 12 million pairs per month.

Following is the complete table –

Arcadia

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 action

Exports, 18

Imports, 54

Imports, 18

Exports, 54

Consumption

14

54

18

26

Gains from trade

Increase in consumption

6

6

3

6

	Arcadia	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 action	Exports, 18	Imports, 54	Imports, 18	Exports, 54
Consumption	14	54	18	26
Gains from trade
Increase in consumption	6	6	3	6