Gains from trade Consider two neighboring island countries called Euphoria and Arcadia. They each have 4 million labor hours available per month…

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4 . Gains from trade Consider two neighboring island countries called Euphoria and Arcadia. They each have 4 million labor hours available per month that they can use to produce jeans, rye, or a combination of both. The following table shows the amount of jeans or rye that can be produced using 1 hour of labor. Jeans RyeCountry (Pairs per hour of labor) (Bushels per hour of labor) Euphoria 8 32Arcadia 12 24 Initially, suppose Arcadia uses 1 million hours of labor per month to produce jeans and 3 million hours per month to produce rye, while Euphoria uses3 million hours of labor per month to produce jeans and 1 million hours per month to produce rye. Consequently, Euphoria produces 24 million pairs ofjeans and 32 million bushels of rye, and Arcadia produces 12 million pairs of jeans and 72 million bushels of rye. 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 rye it produces. Euphoria’s opportunity cost of producing 1 pair of jeans is 4 bushels v of rye, and Arcadia’s opportunity cost of producing 1 pair of jeans is2 bushels V of rye. Therefore, Arcadia V has a comparative advantage in the production of jeans, and Euphoria V has a comparative advantage in the production of rye.

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