Trade Action Options are: [Exports 8, Imports 8], [Imports 24, Exports 24], [Imp

Question

Trade Action Options are: [Exports 8, Imports 8], [Imports 24, Exports 24], [Imports 8, Exports 8], [Exports 24, Imports 24]

Attempts: Keep the Highest 24 2. Gains from trade Consider two neighbouring island countries called Dolorium and Contente. They each have 4 mllion labour hours available per week that they can use to produce wheat, jeans, or a combination of both. The following table shows the amount of wheat or jeans that can be produced using one hour of labour. Wheat Jeans (Kilograms per hour of labour) (Pairs per hour of labour) Dolorium 4 16 Contente Initially, suppose Contente uses 1 million hours of labour per week to produce wheat and 3 million hours per week to produce jeans, while Dolorium uses 2 million hours of labour per week to produce wheat and 2 million hours per week to produce jeans Consequently, Dolorium produces 8 million kilograms of wheat and 32 million pairs of jeans, and Contente produces 3 million kilograms of wheat and 18 milion 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 wheat and jeans it produces. Dolorium's opportunity cost of producing one kilogram of wheat is 4 pairs of jeans, and Contente's opportunity cost of producing one kilogram of wheat is 2 pais of jeans. Therefore, Contente has a comparative advantage in the production of wheat and_ Doloriumhas 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 wheat will produce 16 ml kilograms per week, and the country that produces jeans will produce 64 million pairs per week. In the following table, enter each country's production decision on the second row of the table (marked "Production"

Explanation / Answer

With no trade:

Dolorium's opportunity cost of producing one kilogram of wheat is 16/4 = 4 pairs of jeans , and Contente's opportunity cost of producing one kilogram of wheat is 6/3= 2 pairs of jeans . Therefore , Contente has a comparative advantage in the production of wheat and Dolorium has a comparative advantage in the production of jeand because Contente's has the lower opportunity cost in producing wheat and Dolorium has lower opportunity cost in producing jeans.

As a whole when there will be trade between Dolorium and contente then there will be gains from trade because now both countries can consume higher level of both goods . For example , earlier without trade Contente can consume only 3 millions of kilograms of wheat but after trade now can 8 millions of kilograms of wheat.

Similarly , without trade Dolorium can consume only 32 millions of pairs of jeans but after trade now can consume 40 millions of pairs of jeans.

Overall both Dolorium and contente gains from trade.

Wheat (kgs per hour of labour) Jeanss (pairs per hour of labour) Dolorium 4 16 Contente 3 6

Related Questions

Navigate

• Browse (All)
• Browse T
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.