3. Gains from trade
Consider two neighboring island countries called Bellissima and Felicidad. They each have a million labor hours available per month 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 an hour of labor.
Rye
Jeans
Country (Bushels per hour of labor)
Bellissima
(Pairs per hour of labor)
Felicidad
Initially, suppose Bellissima uses a million hours of labor per month to produce rye and a million hours per month to produce jeans, while Felicidad uses 3 million hours of labor per month to produce rye and a million hours per month to produce jeans. Consequently, Bellissima produces a million bushels of rye and 36 million pairs of jeans, and Felicidad produces 12 million bushels of rye and 16 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.
Bellissima's opportunity cost of producing a bushel of rye is 1/36 of a pair of jeans, and Felicidad's opportunity cost of producing a bushel of rye is 1/16 of a pair of jeans. Therefore, Bellissima has a comparative advantage in the production of rye, and Felicidad 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 produce a million bushels per month, and the country that produces jeans will produce 36 million pairs per month.