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GAINS OF TRADE

Scarcity, Choice, and Economic Systems Graded Assignment | Read Chapter 2| Back to Assignment Due Sunday 02.03.19 at 11:45 PM Attempts Average: /18 6. Gains from trade Aa Aa Consider two neighboring island countries, Arcadia and Felicidad. Each has 24,000 labor hours available per month that it can use to produce jeans, wheat, or a combination of both. The following table shows the amount of labor hours required to produce one pair of jeans or one bushel of wheat. Jeans (Labor hours per pair) 48 20 Wheat (Labor hours per bushel) 12 10 Arcadia Felicidad has an absolute advantage in the production of jeans, and has an absolute advantage in the production of wheat. Initially, suppose Arcadia uses 18,000 hours of labor per month to produce jeans and 6,00 produce wheat, while Felicidad uses 6,000 produce wheat. Consequently, Arcadia produces 375 pairs of jeans and 500 bushels of wheat, and Felicidad produces 300 pairs of jeans and 1,800 bushels of wheat. Assume there are no other countries willing to trade goods, so in the absence of trade between these two countries, each country consumes the a 0 hours per month to hours of labor per month to produce jeans and 18,000 hours per month to mount of jeans and wheat it produces. Arcadias opportunity cost of producing one pair of jeans is cost of producing one pair of jeans is advantage in the production of jeans, and of wheat, and Felicidads opportunity of wheat. Therefore, has a comparative has a comparative advantage in the production of wheat. letely specializes in the production of the good in which it has a comparative advantage, Suppose that Arcadia comp producing only that good. It will produce Suppose also that Felicidad does not specialize and uses 18,000 hours of labor to produce ieans and 6,000 hoursoInitially, suppose Arcadia uses 18,000 hours of labor per month to produce jeans and 6,000 hours per month to produce wheat, while Felicidad uses 6,000 hours of labor per month to produce jeans and 18,000 hours per month to produce wheat. Consequently, Arcadia produces 375 pairs of jeans and 500 bushels of wheat, and Felicidad products 300 pairs of jeans and 1,800 bushels of wheat. 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 jeans and wheat it produces Arcadias opportunity cost of producing one pair of jeans is cost of producing one pair of jeans is advantage in the production of jeans, and of wheat, and Felicidads opportunity of wheat. Therefore, has a comparative has a comparative advantage in the production of wheat. Suppose that Arcadia 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 jeans and 6,000 hours of labor to produce wheat. It will produce pairs of jeans and bushels of wheat. Suppose Arcadia and Felicidad agree to trade with each other, exchanging 450 pairs of jeans for 1,350 bushels of wheat. In particular, Arcadia will export the goods it produces and Felicidad will export the goods that Arcadia does not produce. With trade, Arcadia will jeans and wheat. Felicidad will jeans and wheat. When neither country specializes, the total production of jeans is production of wheat is pairs per month, and the total bushels per month. When Arcadia specializes and Felicidad still produces the combination of goods using 18,000 hours of labor to produce jeans and 6,000 hours of labor to produce wheat, the total production of jeans becomes per month, and the total production of wheat became pairs bushels per month

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