42. In Canada, the production of 1 unit of food (F) requires 1/8 of a unit of labour and the production of 1 unit of shelter (S) requires 1/6 of a unit of labour. In Morocco, the production of 1 unit of food (F) requires 1/4 of a unit of labour and the production of 1 unit of shelter (S) requires 1/2 of a unit of labour. Canada has 30 units of labour and Morocco has 60 units of labour. In the absence of trade, Canada produces and consumes 120 units of food and 90 units of shelter, and Morocco produces and consumes 120 units of food and 60 units of shelter. These two products and these two countries are the only ones in the world. When trade is opened up, the two countries trade food for shelter at a 3-to-2 ratio, and 120 units of food and 80 units of shelter are exchanged. On the diagrams provided, draw and clearly label the production possibilities curve for each country. Indicate where each country starts out before trade occurs (with a Co for Canada and a Mo for Morocco). Indicate the point at which each country produces (using a Cp for Canada and a Mp for Morocco) and consumes (using a C* for Canada and a M* for Morocco), and show the trading line (the consumption possibilities curve) for each country. Label your diagram as completely as possible. Below the diagram, describe in 10 words or less how we know that both countries are made better off by trade. (10 marks)

Gain from trade

Consider two neighboring island countries, Arcadia and Felicidad. Each has 72,000 labor hours available per month that it can use to produce jeans, wheat , or a combination of both. The following table shows the amount of labor hours required to produce one pair of jeans or one bushel of wheat.

Jeans

(Labor hours per pair)

Wheat

(Labor hours per bushel)

Initially , suppose Arcadia uses 54,000 hours of labor per month to produce jeans and 18,000 hours per month to produce Wheat, while Felicidad uses 18,000 hours of labor per month to produce jeans and 54,000 hours per month to produce wheat. Consequently, Arcadia produces 675 pairs of jeans and 1,125 bushels of wheat, and Felicidad produces 750 pairs of jeans and 4,500 busheis of wheat. Assume there are no other countries willing to trade goods, so in the absence of trade between the two countries, each country consumes the amount the of jeans and wheat it produces.

Arcadia's opportunity cost of prducing on pair of jeans is (1) ____________ ((5 bushels - 1/2 bushel - 2 bushels - 1/5 bushels )) of wheat, and Felicidad's opportunity cost of producing one pair of jeans is (2)_______________ (( 1/5 bushel - 1/2 bushel - 5 bushels - 2 bushels )) of wheat. Therefore,(3)_____________(( Arcadia - Felicidad )) has a comparative advantage in the production of jeans, and (4)______________(( Arcadia - Felicidad )) has a comparative advantage in the production of wheat.

Suppose that Arcadia completely specializes in the production of the good in which it has a comparative advantage, producing only that good. It will produce (5)____________(( 4500 - 3000 - 6000 - 900 )) (6)______________ ((Bushels of wheat - pairs of jeans )) .

Suppose also that Felicidad does not specialize and uses 54,000 hours of labor to produce jeans and 18,000 hours of labor to produce wheat. It will produce (7) __________(( 900 - 2250 - 3000 )) pairs of jeans and (8)__________(( 1500 - 4500 - 6000 )) bushels of wheat.

Suppose Arcadia and Felicidad agree to trade with each other, exchanging 1,100 pairs of jeans for 3,300 bushels of wheat. In particular, Arcadia will export the goods it produces and Felicidad will expor the goods that Arcadia does not produce.

With trade, Arcadia will (9)____________(( export - import )) jeans and (10)_____________(( export - import )) wheat. Felicidad will (11)__________(( export - import )) jeans and (12)___________(( export - import )) wheat .

When neithen country specializes, the total production of jeans is (13) _____________ (( 5625 - 2250 - 1425 - 6000 )) pairs per month, and the total production of wheat is (14) ___________ ((5625 - 2250 - 1425 - 6000 )) bushels per month .

When Arcadia specializes and Felicidad still produces the combination of goods using 54,000 hours of labor to produce jeans and 18,000 hours of labor to produce wheat, the total production of jeans becomes (15)___________ (( 2250 - 1425 - 5625 - 6000 )) pairs pers month , and the total production of wheat became (16)__________(( 2250 - 1425 - 5625 - 6000 )) bushels per month.

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