3. Gains from trade Consider two neighboring island countries called Arcadia and Dolorium. They each have 4 million labor hours available per month 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. Rye (Bushels per hour of labor) Jeans (Pairs per hour of labor) Country Arcadia Dolorium 00 20 u Initially, suppose Arcadia uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Dolorium uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Arcadia produces 8 million bushels of rye and 48 million pairs of jeans, and Dolorium produces 15 million bushels of rye and 20 million pairs of jeans. 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 rye and jeans it produces. Arcadia\'s opportunity cost of producing 1 bushel of rye is of jeans, and Dolorium\'s opportunity cost of producing 1 bushel of rye is of jeans. Therefore, has a comparative advantage in the production of rye, and has 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 rye will produce million bushels per month, and the country that produces jeans will produce million pairs 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 rye trades 18 million bushels of rye to the other country in exchange for 54 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 23 million bushels per month, and the total production of jeans was 68 million pairs per month. Because of specialization, the total production of rye has increased by million bushels per month, and the total production of jeans has increased by million pairs per month.
The production table of the two countries Arcadia and Dolorium of the two commodities Rye and Jeans are as follows:
Country
Rye (Bushes per labour hour)
Jeans (Pairs per labour hours)
Arcadia
8
16
Dolorium
5
20
There are 4 million labour hours in the economy.
In Arcadia: producing 8 bushels of Rye sacrifices 16 pairs of Jeans
Therefore producing 1 bushel of rye sacrifices 16/8 = 2 pairs of jeans.
In Dolorium: producing 5 bushels of rye sacrifices 20 pairs of jeans
Therefore producing 1 bushel of rye sacrifices 20/5 = 4 pairs of jeans.
This means that for every bushel of rye produced, Arcadia sacrifices less number of jeans than Dolorium and thus has comparative advantage in rye.
Arcadia’s opportunity cost of producing 1 bushel of rye is 2 pairs of jeans and Dolorium’s opportunit 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.
Now if each country completely specializes in the good it has a comparative advantage in and produces ONLY that good with 4 million labour hours, then:
Arcadia produces: 8*4million = 32 million bushels of rye
Dolorium produces 20*4million = 80 million pairs of jeans.
The table for production, consumption and trade can be filled up as follows:
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
-
-
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
| Country | Rye (Bushes per labour hour) | Jeans (Pairs per labour hours) |
| Arcadia | 8 | 16 |
| Dolorium | 5 | 20 |
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