2. Gains from trade Aa Aa Consider two neighbouring island countries called Euph
ID: 1116863 • Letter: 2
Question
2. Gains from trade Aa Aa Consider two neighbouring island countries called Euphoria and Contente. They each have 4 million labour hours available per month 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 (Pairs per hour of labour) 16 6 (Kilograms per hour of labour) Euphoria Contente Initially, suppose Contente uses 1 million hours of labour per month to produce wheat and 3 million hours per month to produce jeans, while Euphoria uses 2 million hours of labour per month to produce wheat and 2 million hours per month to produce jeans. Consequently, Euphoria produces 8 million kilograms of wheat and 32 million pairs of jeans, and Contente produces 3 million kilograms of wheat and 18 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 wheat and jeans it produces. Euphoria's opportunity cost of producing one kilogram of wheat is producing one kilogram of wheat is production of wheat and of jeans, and Contente's opportunity cost of of jeans. Therefore, has a comparative advantage in the 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 wheat will produce the country that produces jeans will produce production decision on the second row of the table (marked "Production"). kilograms per month, and pairs per month. In the following table, enter each country'sExplanation / Answer
Contente’s opportunity cost f wheat = 6/3 = 2 jeans
Contente has comparative advantage in wheat.
Euphoria has comparative advantage in jeans( Because opp.cost iis lower)
Number of jeans will be 16*4 =64 million.
Productin of wheat increased by (12-11) = 1 million kg.
Country
Euphoria
Contente
Jeans
Wheat
Jeans
Wheat
Before Trade
Production and consumption
32
8
18
3
After Trade
Production
64
0
0
12
Trade Action
Export
Import
Import
Export
Consumption
46
8
18
4
Gains from trade
Increase in consumption
14
0
0
1
Country
Euphoria
Contente
Jeans
Wheat
Jeans
Wheat
Before Trade
Production and consumption
32
8
18
3
After Trade
Production
64
0
0
12
Trade Action
Export
Import
Import
Export
Consumption
46
8
18
4
Gains from trade
Increase in consumption
14
0
0
1
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