3. Gains from trade Suppose there exist two imaginary countries,Yosemite and Sequoia. Their labor forces are each capable ofsupplying four million hours per week that can be used to producechinos, pistachios, or some combination of the two. The followingtable shows the amount of chinos or pistachios that can be producedby one hour of labor. Suppose that initially Yosemite uses 1million hours of labor per week to produce chinos and 3 millionhours per week to produce pistachios, while Sequoia uses 3 millionhours of labor per week to produce chinos and 1 million hours perweek to produce pistachios. As a result, Yosemite produces 8million pairs of chinos and 48 million pounds of pistachios, andSequoia produces 15 million pairs of chinos and 20 million poundsof pistachios. Assume there are no other countries willing toengage in trade, so, in the absence of trade between these twocountries, each country consumes the amount of chinos andpistachios it produces. Yosemite's opportunity cost of producing 1pair of chinos is v of pistachios, and Sequoia's opportunity costof producing 1 pair of chinos is - of pistachios. Therefore, has acomparative advantage in the production of chinos, and has acomparative advantage in the production of pistachios. Suppose thateach country completely specializes in the production of the goodin which it has a comparative advantage, producing only that good.In this case, the country that produces chinos will produce millionpairs per week, and the country that produces pistachios willproduce million pounds per week. In the following table, enter eachcountry's production decision on the third row of the table (marked"Production"). Suppose the country that produces chinos trades 18million pairs of chinos to the other country in exchange for 54million pounds of pistachios. In the following table, select theamount of each good that each country exports and imports in theboxes across the row marked "Trade Action," and enter eachcountry's final consumption of each good on the line marked"Consumption." When the two countries did not specialize, the totalproduction of chinos was 23 million pairs per week, and the totalproduction of pistachios was 68 million pounds per week. Because ofspecialization, the total production of chinos has increased bymillion pairs per week, and the total production of pistachios hasincreased by million pounds per week. Because the two countriesproduce more chinos and more pistachios under specialization, eachcountry is able to gain from trade. Calculate the gains fromtrade-that is, the amount by which each country has increased itsconsumption of each good relative to the first row of the table. Inthe following table, enter this difference in the boxes across thelast row (marked "Increase in Consumption").Chinos (Millions ofpairs)Pistachios (Millions of pounds)Chinos (Millions ofpairs)Pistachios (Millions of pounds)
