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C Search Textbook Solutions htmihted . 61 371 S&rtNodeld-225072827;&degioymenth;: 48850022. MINDTAP Aplia Homework: International Trade Dur Today at 11 Pu PST 2. Gains from trade Consider two neighboring sland countries called Contente and Fokodad. They each have 4 milion labor hours avalable per month that they can use to prodace rye, kans, or a combination of both. The following table shows the amount of rye or jeans that cam be produced using 1 hour of lsbot tye eans Country (shoth per howr olf labor)e hou of lebor) Contente 10 Felicidad 16 Initialy, suppose Contente uses 1 mition hours of labor per month to produce rye and 3 mlion hours per month to produce jeans, while Feliodad uses 3 miaion hours of Iabor per month to produce rye and 1 miaion hours per month to produce eans. Consequenty, Contente produces 5 mion bushels of rye and 30 millon pairs of jeans, and fekodad produces 12 millon bushels of rye and 16 milion pairs of jeans Assume there are to trade goods, so, in the absence of trade between these two counties, cach country consumes the amount of rye and jeans it produces no other countries wiling Contente's opportunity cost of producing 1 bushel of rye is of jeans, and Felicdad's opportunity cost of preducing 1 bushel of rye ofjeans. Therefore, has·comparative advantage the producton of rye, and has a comparative n the production of jeans, Suppose that each country completely spedalzes in the production of the good in wihich it has a comparative advantage, producing only that good. In this case, the country that produces rye will produceilion bushels per month, and the country that produces jeans wl producemlalon pairs per month In the following table, enter each country's production deosion on the chird row of the table (marked "Production) Type here to search

Explanation / Answer

Output table when each country uses 4 million hours per good, is as follows.

(1) Opportunity cost (OC)

In Contente, OC of rye = 40/20 = 2 jeans

In Felicidad, OC of rye = 64/16 = 4 jeans

(2) So,

Contente has comparative advantage in rye (because OC of rye is lower).

Felicidad has comparative advantage in jeans.

(3)

Country making rye (Contente) will produce 20 million rye.

Country making jeans (Felicidad) will produce 64 million jeans.

(4) Because of specialization,

Production of rye has increased by 3 million (= 20 million - 17 million).

Production of jeans has increased by 18 million (= 64 million - 46 million).

(5) Contente trades (exports) 13 million rye in exchange of (imports) 39 million jeans.

CONTENTE

FELICIDAD

Rye

Jeans

Rye

Jeans

WITHOUT TRADE:

Prod. & Consumption

5

30

12

16

WITH TRADE

Production

20

0

0

Trade Action:

Export:

Import:

Import:

Export:

13 rye

39 jeans

13 rye

39 jeans

Consumption

7

39

13

25

GAIN FROM TRADE

Increase in Consumption

2

9

1

9

Rye (Million) Jeans (Million) Contente 5 x 4 = 20 10 x 4 = 40 Felicidad 4 x 4 = 16 16 x 4 = 64

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