Questions: Gains from trade Suppose there exist two imaginary countries, Everglades and Denali. Their labor forces are each capable of supplying four million hours per day that can be used to produce shorts, almonds, or some combination of the two. The following table shows the amount of shorts or almonds that can be produced by one hour of labor. Country Shorts (Pairs per hour of labor) Almonds (Pounds per hour of labor) --------- Everglades 4 16 Denali 6 12 Suppose that initially Denali uses 1 million hours of labor per day to produce shorts and 3 million hours per day to produce almonds, while Everglades uses 3 million hours of labor per day to produce shorts and 1 million hours per day to produce almonds. As a result, Everglades produces 12 million pairs of shorts and 16 million pounds of almonds, and Denali produces 6 million pairs of shorts and 36 million pounds of almonds. Assume there are no other countries willing to engage in trade, so, in the absence of trade between these two countries, each country consumes the amount of shorts and almonds it produces. Everglades's opportunity cost of producing 1 pair of shorts is of almonds, and Denali's opportunity cost of producing 1 pair of shorts is of almonds. Therefore, has a comparative advantage in the production of shorts, and has a comparative advantage in the production of almonds.

To determine the opportunity costs and comparative advantages for Everglades and Denali, we need to calculate the opportunity cost of producing one pair of shorts in terms of almonds for each country.

Opportunity Cost Calculations:

1. Everglades:

   • Everglades can produce 4 pairs of shorts or 16 pounds of almonds per hour.
   • The opportunity cost of producing 1 pair of shorts is the amount of almonds that could have been produced instead.
   • Opportunity cost of 1 pair of shorts = 16 pounds of almonds / 4 pairs of shorts = 4 pounds of almonds.

2. Denali:

   • Denali can produce 6 pairs of shorts or 12 pounds of almonds per hour.
   • The opportunity cost of producing 1 pair of shorts is the amount of almonds that could have been produced instead.
   • Opportunity cost of 1 pair of shorts = 12 pounds of almonds / 6 pairs of shorts = 2 pounds of almonds.

Comparative Advantage:

• Comparative advantage is determined by which country has the lower opportunity cost for producing a good.
• Everglades has an opportunity cost of 4 pounds of almonds per pair of shorts, while Denali has an opportunity cost of 2 pounds of almonds per pair of shorts.
• Therefore, Denali has a comparative advantage in the production of shorts because it has a lower opportunity cost.
• Conversely, Everglades has a comparative advantage in the production of almonds because it has a higher opportunity cost for producing shorts, meaning it gives up more almonds to produce shorts.

Summary:

• Everglades's opportunity cost of producing 1 pair of shorts is 4 pounds of almonds.
• Denali's opportunity cost of producing 1 pair of shorts is 2 pounds of almonds.
• Denali has a comparative advantage in the production of shorts.
• Everglades has a comparative advantage in the production of almonds.