Gains from trade
Consider two neighboring island countries called Arcadia and Dolorium. They each have 4 million labor hours available per month that they can use to produce jeans, corn, or a combination of both. The following table shows the amount of jeans or corn that can be produced using 1 hour of labor.
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Arcadia
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6
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12
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Dolorium
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4
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16
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Initially, suppose Arcadia uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn, while Dolorium uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Arcadia produces 6 million pairs of jeans and 36 million bushels of corn, and Dolorium produces 12 million pairs of jeans and 16 million bushels of corn. 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 corn it produces. Arcadia's opportunity cost of producing 1 pair of jeans isof corn, and Dolorium's opportunity cost of producing 1 pair of jeans isof corn. Therefore,has a comparative advantage in the production of jeans, andhas a comparative advantage in the production of corn. 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 jeans will producemillion pairs per month, and the country that produces corn will producemillion bushels per month. In the following table, enter each country's production decision on the third row of the table (marked "Production"). Suppose the country that produces jeans trades 14 million pairs of jeans to the other country in exchange for 42 million bushels of corn. 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." When the two countries did not specialize, the total production of jeans was 18 million pairs per month, and the total production of corn was 52 million bushels per month. Because of specialization, the total production of jeans has increased bymillion pairs per month, and the total production of corn has increased bymillion bushels per month. Because the two countries produce more jeans and more corn 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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Without Trade
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Production
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6
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36
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12
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16
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Consumption
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6
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36
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12
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16
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With Trade
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Production
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Trade action
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Consumption
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Gains from Trade
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Increase in Consumption
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