Consider two neighboring island countries called Felicidad and Arcadia. They each have 4 million labor hours available per week that they can use to produce rye, jeans, or a combination of both. The following table shows the amount of rye or jeans that can be produced using 1 hour of labor. Rye Jeans
Country
(Bushels per hour of labor) (Pairs per hour of labor)
Felicidad 4 16
Arcadia 5 10
Initially, suppose Arcadia uses 1 million hours of labor per month to produce rye and 3 million hours per month to produce jeans, while Felicidad uses 3 million hours of labor per month to produce rye and 1 million hours per month to produce jeans. Consequently, Arcadia produces 8 million bushels of rye and 48 million pairs of jeans, and Felicidad produces 15 million bushels of rye and 20 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 rye and jeans it produces. Arcadia's opportunity cost of producing 1 bushel of rye isof jeans, and Felicidad's opportunity cost of producing 1 bushel of rye isof jeans. Therefore, has a comparative advantage in the production of rye, 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 rye will producemillion bushels per month, and the country that produces jeans will producemillion pairs 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 rye trades 13 million bushels of rye to the other country in exchange for 39 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."
When the two countries did not specialize, the total production of rye was 17 million bushels per month, and the total production of jeans was 46 million pairs per month. Because of specialization, the total production of rye has increased by___million bushels per month, and the total production of jeans has increased bymillion pairs per month.
Felicidad Arcadia
Rye Jeans Rye Jeans
WITHOUT TRADE:
Production 12 16 5 10
Consumption 12 16 5 10
WITH TRADE:
Production
Trade Action
Consumption
Gains from Trade
Increase in Consumption