Quizzol

QUESTION:

Suppose there exist two imaginary countries, Everglades and Glacier. Their labor forces are each capable of supplying four million hours per day that can be used to produce pistachios, chinos, or some combination of the two. The following table shows the amount of pistachios or chinos that can be produced by one hour of labor.

Country	Pistachios	Chinos
Country	(Pounds per hour of labor)	(Pairs per hour of labor)
Everglades	4	16
Glacier	6	12

Suppose that initially Glacier uses 1 million hours of labor per day to produce pistachios and 3 million hours per day to produce chinos, while Everglades uses 3 million hours of labor per day to produce pistachios and 1 million hours per day to produce chinos. As a result, Everglades produces 12 million pounds of pistachios and 16 million pairs of chinos, and Glacier produces 6 million pounds of pistachios and 36 million pairs of chinos. Assume there are no other countries willing to engage in trade, so, in the absence of trade between these two countries, each country consumes the amount of pistachios and chinos it produces.

Everglades's opportunity cost of producing 1 pound of pistachios is4 pairs of chinos, and Glacier's opportunity cost of producing 1 pound of pistachios is of chinos. Therefore, has a comparative advantage in the production of pistachios, and has a comparative advantage in the production of chinos.

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 pistachios will produce

million pounds per day, and the country that produces chinos will produce

million pairs per day.

In the following table, enter each country's production decision on the third row of the table (marked “Production”).

Suppose the country that produces pistachios trades 14 million pounds of pistachios to the other country in exchange for 42 million pairs of chinos.

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 pistachios was 18 million pounds per day, and the total production of chinos was 52 million pairs per day. Because of specialization, the total production of pistachios has increased by

million pounds per day, and the total production of chinos has increased by

million pairs per day.

Because the two countries produce more pistachios and more chinos 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”).

	Everglades		Glacier
	Pistachios	Chinos	Pistachios	Chinos
	(Millions of pounds)	(Millions of pairs)	(Millions of pounds)	(Millions of pairs)
Without Trade
Production	12	16	6	36
Consumption	12	16	6	36
With Trade
Production
Trade action
Consumption
Gains from Trade
Increase in Consumption

ANSWER:

Everglades's opportunity cost of producing 1 pound of pistachios is4 pairs Correct

of chinos, and Glacier's opportunity cost of producing 1 pound of pistachios is2 pairs Correct

of chinos. Therefore,Glacier Correct

has a comparative advantage in the production of pistachios, andEverglades Correct

has a comparative advantage in the production of chinos.

Points:

1 / 1

Using an hour of labor, Everglades can produce 4 pounds of pistachios or 16 pairs of chinos. Therefore, the opportunity cost of a pound of pistachios is 4 pairs per pound (

\frac{16 pairs}{4 pounds}

). Using an hour of labor, Glacier can produce 6 pounds of pistachios or 12 pairs of chinos. Therefore, the opportunity cost of a pound of pistachios is 2 pairs per pound (

\frac{12 pairs}{6 pounds}

). Since Glacier gives up fewer pairs per pound of pistachios, it has a comparative advantage in the production of pistachios.

You can compute Everglades's opportunity cost of a pair of chinos by taking the reciprocal of the opportunity cost of a pound of pistachios. That is, the opportunity cost of a pair of chinos, in this case, is 1/4 pound per pair. Similarly, Glacier's opportunity cost of a pair of chinos is equal to 1/2 pound per pair. Since Everglades gives up fewer pounds of pistachios per pair of chinos, it has a comparative advantage in the production of chinos.

million pounds per day, and the country that produces chinos will produce

million pairs per day.

Points:

1 / 1

In the following table, enter each country's production decision on the third row of the table (marked “Production”).

Recall that Glacier has a comparative advantage in the production of pistachios and that Everglades has a comparative advantage in the production of chinos. If Glacier completely specializes in the production of pistachios, it produces 24 million pounds of pistachios (

4 million hours \times 6 pounds of pistachios per hour

). Similarly, if Everglades completely specializes in the production of chinos, it produces 64 million pairs of chinos (

4 million hours \times 16 pairs of chinos per hour

Suppose the country that produces pistachios trades 14 million pounds of pistachios to the other country in exchange for 42 million pairs of chinos.

When they specialize, Glacier produces 24 million pounds of pistachios per day, and Everglades produces 64 million pairs of chinos per day. If Glacier trades 14 million pounds of pistachios for 42 million pairs of chinos from Everglades, Everglades will consume 14 million pounds of pistachios and 22 million pairs of chinos, and Glacier will consume 10 million pounds of pistachios and 42 million pairs of chinos.

Note that when a country imports goods, it brings them into the country. In this case, the consumption of that good must be larger than what the country produces itself. Similarly, when a country exports goods, it sends them out of the country. In this case, the consumption of that good must be smaller than what the country produces itself.

million pounds per day, and the total production of chinos has increased by

million pairs per day.

Points:

1 / 1

Because the two countries produce more pistachios and more chinos under specialization, each country is able to gain from trade.

Initially, before the two countries specialized, Everglades produced (and consumed) 12 million pounds of pistachios and 16 million pairs of chinos per day, and Glacier produced (and consumed) 6 million pounds of pistachios and 36 million pairs of chinos per day.

When they specialized, Glacier produced 24 million pounds of pistachios per day, and Everglades produced 64 million pairs of chinos per day. This is an increase of 6 million pounds of pistachios and 12 million pairs of chinos per day. If Glacier trades 14 million pounds of pistachios for 42 million pairs of chinos from Everglades, both countries will end up consuming more of both goods. In particular, there will be an increase of 2 million pounds of pistachios and 6 million pairs of chinos for Everglades and an increase of 4 million pounds of pistachios and 6 million pairs of chinos for Glacier.

	Everglades		Glacier
	Pistachios	Chinos	Pistachios	Chinos
	(Millions of pounds)	(Millions of pairs)	(Millions of pounds)	(Millions of pairs)
Without Trade
Production	12	16	6	36
Consumption	12	16	6	36
With Trade
Production	0	64	24	0
Trade action	Imports 14	Exports 42	Exports 14	Imports 42
Consumption	14	22	10	42
Gains from Trade
Increase in Consumption	2	6	4	6

Points:

1 / 1

You can also see how each country gains from trade by using a production possibilities frontier (PPF) diagram. The blue lines on the following diagrams show the PPFs of Glacier and Everglades. The black points (plus symbol) show their initial consumption of pistachios and chinos. The orange points (square symbol) show the amount of pistachios and chinos each consumes after specialization and trade.

Note that the total gains from trade are 6 million pounds of pistachios and 12 million pairs of chinos per day, which is the total increase in production you calculated earlier. Visually, you can see that there are gains from trade, because countries are able to consume at points that were previously not feasible (that is, points outside of their PPF).

Posted by Cleveland on August 29, 2024