Measuring the Gains from Trade. Consider two countries, Tableland and Chairland, each capable of producing tables and chairs. Chairland can produce the following combinations of chairs and tables:
All chairs and no tables: 36 chairs per day
All tables and no chairs: 18 tables per day
Tableland can produce the following combinations of chairs and tables:
All chairs and no tables: 40 chairs per day
All tables and no chairs: 40 tables per day
In each country, there is a fixed trade-off of tables for chairs
a. Draw the two production possibilities curves, with chairs on the vertical axis and tables on the horizontal axis.
b. Suppose each country is initially self-sufficient and divides its resources equally between the two goods. How much does each country produce and consume?
c. Which country has a comparative advantage in producing tables? Which country has a comparative advantage in producing chairs?
d. If the two countries split the difference between the buyer’s willingness to pay for chairs and the seller’s willingness to accept, in terms of chairs per table, what are the terms of trade?
e. Draw the consumption possibilities curves.
f. Suppose each country specializes in the good for which it has a comparative advantage, and it exchanges 14 tables for some quantity of chairs. Compute the consumption bundles—bundles mean the consumption of tables and chairs—for each country.