In the table below both countries produce at the bold levels of output without trade.Assume the US and UK initiate trade and begin to completely specialize in the commodity in which they have a comparative advantage.What would the gains from trade be if the US trades 50 units of rice to the UK for 50 units of pudding?
Production Possibility Schedule for Rice and Pudding in the United States and the United Kingdom
$\begin{array}{|cc|cc|}
\hline \text { United States } &&\text {United Kingdom } \
\hline \text {Rice} & \text {Pudding} &\text { Rice }& \text {Pudding} \
\hline 140 & 0 & 35 & 0 \
\hline 120 & 10 & 30 & 20 \
\hline 100 & 20 & 25 & 40 \
\hline 80 & 30 & 20 & 60 \
\hline 60 & 40 & 15 & 80 \
\hline 40 & 50 & 10 & 100 \
\hline 20 & 60 & 5 & 120 \
\hline 0 & 70 & 0 & 140 \
\hline
\end{array}$
A)US: 10 units of pudding,20 units of rice
B)US: 20 units of pudding,10 units of rice
C)UK: 10 units of pudding,20 units of rice
D)UK: 20 units of pudding,10 units of rice

Question

In the table below both countries produce at the bold levels of output without trade.Assume the US and UK initiate trade and begin to completely specialize in the commodity in which they have a comparative advantage.What would the gains from trade be if the US trades 50 units of rice to the UK for 50 units of pudding? 
Production Possibility Schedule for Rice and Pudding in the United States and the United Kingdom
$\begin{array}{|cc|cc|}
\hline \text { United States } &&\text {United Kingdom } \
\hline \text {Rice} & \text {Pudding} &\text { Rice }& \text {Pudding} \
\hline 140 & 0 & 35 & 0 \
\hline 120 & 10 & 30 & 20 \
\hline 100 & 20 & 25 & 40 \
\hline 80 & 30 & 20 & 60 \
\hline 60 & 40 & 15 & 80 \
\hline 40 & 50 & 10 & 100 \
\hline 20 & 60 & 5 & 120 \
\hline 0 & 70 & 0 & 140 \
\hline
\end{array}$
A)US: 10 units of pudding,20 units of rice
B)US: 20 units of pudding,10 units of rice
C)UK: 10 units of pudding,20 units of rice
D)UK: 20 units of pudding,10 units of rice

Quizplus · Accepted Answer

First, we need to determine the comparative advantage of each country in producing rice or pudding.

- The opportunity cost of producing one unit of rice in the US is 2 units of pudding (10/5= 2).
- The opportunity cost of producing one unit of pudding in the US is 0.5 unit of rice (5/10= 0.5).
- The opportunity cost of producing one unit of rice in the UK is 1 unit of pudding (20/20= 1).
- The opportunity cost of producing one unit of pudding in the UK is 1 unit of rice (20/20= 1).

As we can see, the US has a comparative advantage in producing pudding, while the UK has a comparative advantage in producing rice.

If the US trades 50 units of rice to the UK for 50 units of pudding, each country will completely specialize in the production of the good in which it has a comparative advantage.

- The US will produce 100 units of pudding (using all its resources) and the UK will produce 40 units of rice (using all its resources).
- After trade, the US will export 50 units of pudding to the UK and will have 50 units of rice left for its own consumption.
- The UK will export 50 units of rice to the US and will have 10 units of pudding left for its own consumption.

Therefore, the gains from trade for the US are 20 units of pudding (50-30) and the gains from trade for the UK are 10 units of rice (50-40). The answer is B, as the US will gain 20 units of pudding and 10 units of rice after trade.

In the Table Below Both Countries Produce at the Bold