1. Business
  2. Economics
  3. 3 gains from trade consider two neighboring island countries called...

Question: 3 gains from trade consider two neighboring island countries called...

Question details

3. Gains from trade Consider two neighboring island countries called Felicidad and Bellissima. 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. Corn eans (Pairs per hour of labor) 20 Country (Bushels per hour of labor) Felicidad Initially, suppose Bellissima uses 1 million hours of labor per week to produce corn and 3 million hours per week to produce jeans, while Felicidad uses 3 million hours of labor per week to produce corn and 1 million hours per week to produce jeans. Consequently, Felicidad produces 15 million bushels of corn and 20 million pairs of jeans, and Bellissima produces B million bushels of corn and 48 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 Felicidads opportunity cost of producing 1 bushel of corn is of jeans, and Bellissimas opportunity cost of producing 1 bushel of corn is of jeans. Therefore, has a comparative advantage in the production of corn, and 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 com will produce million bushels per week, and the country that produces jeans will produce million pairs per week In the rollowing table, enter each countrys production decision on the third row of the table (marked Production Suppose the country that produces com trades 18 million bushels of corn to the other country in exchange for 54 million pairs of jeans. In the rollowing 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 countrys final consumption of each good on the line marked ConsumptioVn When the two countries did not specialize, the total production of corn was 23 million bushels per week, and the total production of jeans was 68 million pairs per week. Because of specialization, the total production of corn has increased by production of jeans has increased by million bushels per week, and the total million pairs per week

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). Felicidad Bellissima Corn (Millions of bushels) Corn (Millions of bushels) Jeans (Millions of pairs) (Millions of pairs) Without Trade Production 15 20 48 Consumption 15 20 48 With Trade Production Trade action Consumption Gains from Trade Increase in Consumption Grada It Now Save & Continua Continue withaut saving

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution