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Consider two neighboring island countries called Bellissima and Euphoria. They each have 4 million labor hours available per week that they can use to produce corn, jeans, or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor.

Country

Corn

Jeans

(Bushels per hour of labor)

(Pairs per hour of labor)

Initially, suppose Bellissima uses 1 million hours of labor per week to produce corn and 3 million hours per week to produce jeans, while Euphoria uses 3 million hours of labor per week to produce corn and 1 million hours per week to produce jeans. Consequently, Bellissima produces 6 million bushels of corn and 36 million pairs of jeans, and Euphoria produces 12 million bushels of corn and 16 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 corn and jeans it produces.

1/2 pair

1/4 pair

2 pairs

4 pairs

1/2 pair

1/4 pair

2 pairs

4 pairs

Bellissima

Euphoria

Bellissima

Euphoria

Points:

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Explanation:

Points:

In the following table, enter each country's production decision on the third row of the table (marked "Production").

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Explanation:

Suppose the country that produces corn trades 14 million bushels of corn to the other country in exchange for 42 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."

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Explanation:

Points:

Because the two countries produce more corn and more jeans under specialization, each country is able to gain from trade.

Calculate the gains from trade—that is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").

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Explanation:

Bellissima

Euphoria

Corn

Jeans

Corn

Jeans

(Millions of bushels)

(Millions of pairs)

(Millions of bushels)

(Millions of pairs)

Exports 14

Imports 14

Exports 42

Imports 42

Exports 14

Imports 14

Exports 42

Imports 42

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trade

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Consider two neighboring island countries called Bellissima and Euphoria. They each have 4 million labor hours available per week that they can use to produce corn, jeans, or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor.

Country

Corn

Jeans

(Bushels per hour of labor)

(Pairs per hour of labor)

Bellissima 6 12 Euphoria 4 16

Initially, suppose Bellissima uses 1 million hours of labor per week to produce corn and 3 million hours per week to produce jeans, while Euphoria uses 3 million hours of labor per week to produce corn and 1 million hours per week to produce jeans. Consequently, Bellissima produces 6 million bushels of corn and 36 million pairs of jeans, and Euphoria produces 12 million bushels of corn and 16 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 corn and jeans it produces.

Bellissima's opportunity cost of producing 1 bushel of corn is selector 1 {C}

1/2 pair

1/4 pair

2 pairs

4 pairs

of jeans, and Euphoria's opportunity cost of producing 1 bushel of corn is selector 2   

1/2 pair

1/4 pair

2 pairs

4 pairs

of jeans. Therefore, selector 3   

Bellissima

Euphoria

has a comparative advantage in the production of corn, and selector 4   

Bellissima

Euphoria

has a comparative advantage in the production of jeans.

Points:

Close Explanation

Explanation:

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 corn will produce million bushels per week, and the country that produces jeans will produce million pairs per week.

Points:

In the following table, enter each country's production decision on the third row of the table (marked "Production").

Close Explanation

Explanation:

Suppose the country that produces corn trades 14 million bushels of corn to the other country in exchange for 42 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."

Close Explanation

Explanation:

When the two countries did not specialize, the total production of corn was 18 million bushels per week, and the total production of jeans was 52 million pairs per week. Because of specialization, the total production of corn has increased by million bushels per week, and the total production of jeans has increased by million pairs per week.

Points:

Because the two countries produce more corn and more jeans under specialization, each country is able to gain from trade.

Calculate the gains from trade—that is, the amount by which each country has increased its consumption of each good relative to the first row of the table. In the following table, enter this difference in the boxes across the last row (marked "Increase in Consumption").

Close Explanation

Explanation:

Bellissima

Euphoria

Corn

Jeans

Corn

Jeans

(Millions of bushels)

(Millions of pairs)

(Millions of bushels)

(Millions of pairs)

Without Trade Production 6 36 12 16 Consumption 6 36 12 16 With Trade Production Trade action selector 1   

Exports 14

Imports 14

selector 2   

Exports 42

Imports 42

selector 3   

Exports 14

Imports 14

selector 4   

Exports 42

Imports 42

Consumption Gains from Trade Increase in Consumption

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Explanation / Answer

Answer

1)

i) We can see from the first table that with one hour Bellissima can produce either 6 Bushel of corn or 12 pairs of jeans.So in order to produce 6 bushel of corn Bellissima has to sacrifice 12 pairs of jeans, Hence in producing 1 brushel he has to sacrifice 2 Pairs of jeans.

Hence opportunity cost of Producing corn is (c) 2 pairs of jeans.

ii)

We can see from the first table that with one hour Euphoria can produce either 4 Bushel of corn or 16 pairs of jeans.So in order to produce 4 bushel of corn Euphoria has to sacrifice 16 pairs of jeans, Hence in producing 1 brushel he has to sacrifice 4 Pairs of jeans.

Hence opportunity cost of Producing corn is (d) 4 pairs of jeans.

As Opportunity cost of producing corn is less for Bellissima hence Bellissima has comparative advantage in producing corn.

Similarly Opportunity cost of producing jeans for Bellissima is 1/2 bushel of corn and Opportunity cost of Producing jeans for Euphoria is 1/4 bushel of coen. Hence Euphoria has comparative advantage in producing Jeans

Hence Bellissima will produce corn only with 4 million labor hours. Hence Bellissima will produce 4 million*6 = 24 million bushel of corn. Euphoria will produce only jeans, Hence Euphoria will produce 16*4 million = 64 million pairs of jeans.

Now they trade 14 million for corn for 42 million pairs of jeans. Hence Bellissima will end up consuming 10 million bushel of corn and 42 million pair of jeans. And finally Euphoria will consume 14 million bushel of corn and 22 million pairs of jeans.

Imports = 0

Imports=42

Imports = 14

Imports = 0

10

42

14

22

BELLISSIMA EUPHORIA Corn Jeans Corn Jeans Millions of Bushels Millions of pairs Millions of Bushels Millions of pairs Without Trade Production 6 36 12 16 Consumption 6 36 12 16 WITH TRADE Production 24 0 0 64 Trade Action Exports = 14

Imports = 0

Exports = 0

Imports=42

Exports = 0

Imports = 14

Exports = 42

Imports = 0

Consumption

10

42

14

22

GAINS FROM TRADE Increase in consumption 4 6 2 6

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