Gains from trade

Question

Consider two neighboring island countries called Felicidad and Contente. They each have 4 million labor hours available per month that they can use to produce jeans, corn, or a combination of both. The following table shows the amount of jeans or corn that can be produced using 1 hour of labor.

Country	Jeans	Corn
(Pairs per hour of labor)	(Bushels per hour of labor)
Felicidad	8	32
Contente	12	24

Initially, suppose Contente uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce corn, while Felicidad uses 3 million hours of labor per month to produce jeans and 1 million hours per month to produce corn. Consequently, Felicidad produces 24 million pairs of jeans and 32 million bushels of corn, and Contente produces 12 million pairs of jeans and 72 million bushels of corn. 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 jeans and corn it produces.

Felicidad's opportunity cost of producing 1 pair of jeans is  blank  of corn, and Contente's opportunity cost of producing 1 pair of jeans is  blank  of corn. Therefore, blank   has a comparative advantage in the production of jeans, and    has a comparative advantage in the production of corn.

Answer 1

Felicidad's opportunity cost of producing 1 pair of jeans is 4 bushels of corn, and Contente's opportunity cost of producing 1 pair of jeans is 2 bushels of corn. Therefore, Felicidad has the comparative advantage in the production of corn.

To produce one unit of corn Felicdad only gives up 1/4 of a unit of jeans but Contente has to give up 1/2 a unit of jeans every time it produces a unit of corn. This is why Felicidad has the advantage because it produces corn at a lower opportunity cost than Contente.