Gains from trade
Suppose there exist two imaginary countries, Everglades and Yosemite. Their labor forces are each capable of supplying four million hours per week 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.
[
egin{array}{|c|c|c|}
hline
ext{Country} & ext{Pistachios (Pounds per hour of labor)} & ext{Chinos (Pairs per hour of labor)} \
hline
ext{Everglades} & 4 & 16 \
ext{Yosemite} & 5 & 10 \
hline
end{array}
]
Suppose that initially Yosemite uses 1 million hours of labor per week to produce pistachios and 3 million hours per week to produce chinos, while Everglades uses 3 million hours of labor per week to produce pistachios and 1 million hours per week to produce chinos. As a result, Everglades produces 12 million pounds of pistachios and 16 million pairs of chinos, and Yosemite produces 5 million pounds of pistachios and 30 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 is 4 chinos, and Yosemite's opportunity cost of producing 1 pound of pistachios is 6 chinos. Therefore, Everglades has a comparative advantage in the production of pistachios, and Yosemite 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 12 million pounds per week, and the country that produces chinos will produce 16 million pairs per week.
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 13 million pounds of pistachios to the other country in exchange for 39 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 17 million pounds per week, and the total production of chinos was 46 million pairs per week. Because of specialization, the total production of pistachios has increased by 7 million pounds per week, and the total production of chinos has increased by 6 million pairs per week.
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").
