Consider two neighboring island countries Contente and Felic

Consider two neighboring island countries, Contente and Felicidad. Each has 72,000 labor hours available that it can use to produce corn, jeans, or a combination of both. The following table shows the amount of labor hours required to produce one bushel of corn or one pair of jeans Corn (Labor hours per bushel) 80 24 eans (Labor hours per pair) 16 12 Contente Felicidad Felicidad has an absolute advantage in the production of corn, and advantage in the production of jeans Felicidad has an absolute Initially, suppose Contente uses 54,000 hours of labor to produce corn and 18,000 hours to produce jeans, while Felicidad uses 18,000 hours of labor to produce corn and 54,000 hours to produce jeans. Consequently, Contente produces 675 bushels of corn and 1,125 pairs of jeans, and Felicidad produces 750 bushels of corn and 4,500 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 corn and jeans it produces Contente\'s opportunity cost of producing one bushel of corn is cost of producing one bushel of corn is advantage in the production of corn, and of jeans, and Felicidad\'s opportunity of jeans. Therefore, has a comparative has a comparative advantage in the production of jeans Suppose that Contente completely specializes in the production of the good in which it has a comparative advantage, producing only that good. It will produce Suppose also that Felicidad does not specialize and uses 54,000 hours of labor to produce corn and 18,000 hours of labor to produce jeans. It will produce bushels of corn and pairs of jeans Suppose Contente and Felicidad agree to trade with each other, exchanging 1,100 bushels of corn for 3,300 pairs of jeans. In particular, Contente will export the goods it produces and Felicidad will export the goods that Contente does not produce

Solution

1.

Felicidad

Felicidad

It requires relatively less number of labor hours to producer the corn and Jeans, then it has absolute advantage in both the goods.

2.

Contente’s opportunity cost for corn = (72000/16)/(72000/80) = 5 pair of jeans

Felicidad’s opportunity cost for corn = (72000/12)/(72000/24) = 2 pair of jeans

Felicidad has comparative advantage in corn production and Contente has comparative advantage in Jeans production.

3.

Contente will produce Jeans of quantity = 72000/16 = 4500 pairs

4.

For Felicidad

Amount of corn = 54000/24 = 2250 bushels

Amount of Jeans = 18000/12 = 1500 pairs

5.

With trade,

Contente will have = 1100 bushels of corn & 1200 pair of jeans

Felicidad will have = 1150 bushels of corn and 4800 pair of Jeans

6.

When neither country specializes,

Total production of corn =675+750 = 1425 bushels

Total production of jeans = 1125+4500 = 5625 pairs

7.

Total production of corn becomes = 1100+1150 = 2250 bushels

Total production of Jeans becomes = 4500+1500 = 6000 pairs