Gains from trade Suppose there exist two imaginary countries,Denali and Sequoia. Their labor forces are each capable ofsupplying four million hours per day that can be used to producealmonds, shorts, or some combination of the two. The followingtable shows the amount of almonds or shorts that can be produced byone hour of labor:\table[[,\table[[Almonds],[Country]],\table[[Shorts],[(Pounds perhour of labor)]]],[Denali,8,16],[Sequoia,5,20]] Suppose thatinitially Denali uses 1 million hours of Labor per day to producealmonds and 3 m illion hours per day to produce shorts, whileSequoia uses 3 million hours of labor per day to produce almondsand 1 million hours per day to produce shorts. As a result, Denaliproduces 8 million pounds of almonds and 48 million pairs ofshorts, and Sequoia produces 15 million pounds of almonds and 20million pairs of shorts. Assume there are no other countrieswilling to engage in trade, so, in the absence of trade betweenthese two countries, each country consumes the amount of almondsand shorts it produces. Denal's opportunity cost of producing 1pound of almonds is
?of shorts, and Sequoia's opportunity cost of producing 1 poundof almonds is
?of shorts. Therefore,
?has a comparative advantage in the production of almonds,and
?has a comparative advantage in the production of shorts.Supposethat each country completely specializes in the production of thegood in which it has a comparative advantage, producing only thatgood. In this case, the country that produces almonds willproduce
?million pairs per day. million pounds per day, and the countrythat produces shorts will produce
?In the following table, enter each country's production decisionon the third row of the table (marked "Production"). Suppose thecountry that produces almonds trades 18 million pounds of almondsto the other country in exchange for 54 million pairs of shorts. Inthe following table, select the amount of each good that eachcountry exports and imports in the boxes across the row marked"Trade Action," and enter each country's final consumption of eachgood on the line marked "Consumption." When the two countries didnot specialize, the total production of almonds was 23 millionpounds per day, and the total production of shorts was 68 millionpairs per day. Because of specialization, the total production ofalmonds has increased by
?million pounds per day, and the total production of shorts hasincreased by
?million pairs per day. Because the two countries produce morealmonds and more shorts under specialization, each country is ableto gain from trade.\table[[,Denali,Sequoia],[Almonds (Millions ofpounds),Shorts (Maillions of pairs),Almonds (Millions ofpounds),Shorts (Millions of pairs)],[WithoutTrade],[Production,8,48,15,20],[Consumption,8,48,15,20],[WithTrade],[Production,,,,],[Trade action,
?,
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?,
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