Consider two neighboring island countries called Arcadia and Dolorium.

Consider two neighboring island countries called Arcadia and Dolorium. They each have 4 million labo Show more 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 corn jeans or a combination of both. The following table shows the amount of corn or jeans that can be produced using 1 hour of labor. Country Corn Jeans (Bushels per hour of labor) (Pairs per hour of labor) Arcadia 12 24 Dolorium 8 32 Initially suppose Arcadia uses 1 million hours of labor per month to produce corn and 3 million hours per month to produce jeans while Dolorium uses 3 million hours of labor per month to produce corn and 1 million hours per month to produce jeans. Consequently Arcadia produces 12 million bushels of corn and 72 million pairs of jeans and Dolorium produces 24 million bushels of corn and 32 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 corn and jeans it produces. Arcadias opportunity cost of producing 1 bushel of corn is of jeans and Doloriums opportunity cost of producing 1 bushel of corn is of jeans. ThereforeDolorium has a comparative advantage in the production of corn andArcadia 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 corn will produce million bushels per month and the country that produces jeans will produce million pairs per month. In the following table enter each countrys production decision on the third row of the table (marked Production). Suppose the country that produces corn trades 26 million bushels of corn to the other country in exchange for 78 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 countrys final consumption of each good on the line marked Consumption. When the two countries did not specialize the total production of corn was 36 million bushels per month and the total production of jeans was 104 million pairs per month. Because of specialization the total production of corn has increased by million bushels per month and the total production of jeans has increased by million pairs per month. Because the two countries produce more corn and more jeans under specialization each country is able to gain from trade. Calculate the gains from tradethat 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). Arcadia Dolorium Corn Jeans Corn Jeans (Millions of bushels) (Millions of pairs) (Millions of bushels) (Millions of pairs) Without trade Production 12 72 24 32 Consumption 12 72 24 32 With trade Production Trade action Consumption Gains from trade Increase in consumption Show less

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