6. Gains from trade Aa Aa Consider two neighboring island countries, Bellissima

Question

6. Gains from trade Aa Aa Consider two neighboring island countries, Bellissima and Felicidad. Each has 72,000 labor hours available per month that it can use to produce wheat, jeans, or a combination of both. The following table shows the amount of labor hours required to produce one bushel of wheat or one pair of jeans Wheat Jeans (Labor hours per bushel) (Labor hours per pair) Bellissima 36 12 Felicidad 30 6 has an absolute advantage in the production of wheat, and has an absolute advantage in the production of jeans Initially, suppose Bellissima uses 18,000 hours of labor per month to produce wheat and 54,000 hours per month to produce jeans, while Felicidad uses 54,000 hours of labor per month to produce wheat and 18,000 hours per month to produce jeans. Consequently, Bellissima produces 500 bushels of wheat and 4,500 pairs of jeans, and Felicidad produces 1,800 bushels of wheat and 3,000 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 Bellissima's opportunity cost of producing one bushel of wheat is cost of producing one bushel of wheat is advantage in the production of wheat, and of jeans, and Felicidad's opportunity of jeans. Therefore, has a comparative has a comparative advantage in the production of jeans Suppose that Bellissima 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 18,000 hours of labor to produce wheat and 54,000 hours of labor to produce jeans. It will produce bushels of wheat and pairs of jeans

Explanation / Answer

1. Absolute Advantage:

Absolute advantage is the ability of a country to produce a good or service at a lower per unit cost as compared to any other country that produces same good or service.

Bellissima has an absolute advantage in the production of wheat and jeans both.

2. Bellissima:

36 bushels of wheat = 12 pairs of jeans

1 bushel of corn = 12/36 or 0.33 pairs of jeans

So, opportunity cost of 1 bushel of corn is 0.33 pairs of jeans.

3. Felicidad:

30 bushels of corn = 6 pairs of jeans

1 bushel of corn = 6/30 or 0.2 pairs of jeans

So, opportunity cost of 1 bushel of corn is 0.2 pairs of jeans.

4. A country has a comparative advantage in producing that good if the opportunity cost of producing that good is lower in that country as compared to another country.

Bellissima has comparative advantage in the production of jeans and Felicidad has a comparative advantage in wheat.

4. Bellissima will produce only jeans and in

1 hour it produce 12 pair of jeans

so, in 72000 labor hours, it is able to produce 72000 x 12 = 864000 pairs of jeans

5. When Felicidad uses 18000 hrs of labor to produce wheat then Total production of wheat 18000 x 30 = 540000

When 54000 hours is used to produce jeans then total production of jeans = 54000 x 6 = 324000

6. With trade, Bellissima will export jeans and import wheat.

Felicidad will export wheat and import jeans.

7. Total production of wheat when neither country specializes = 500 by bellissima + 1800 by felicidad = 2300

Total production of jeans when neither country specializes = 4500 + 3000 = 7500

8. When Bellissima specialised but Felicidad does not then total production of jeans = 864000 + 324000 = 1188000

total production of wheat = 0 + 540000 = 540000

Related Questions

Navigate

• Browse (All)
• Browse 6
• Subjects

---

---

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