Answer to Question #61764 in Macroeconomics for samreen

Question

Australia can produce 50 barrels of ethanol or 30 tonnes of wheat a day, while the United States can produce 120 barrels of ethanol or 20 tonnes of wheat a day.
(b) Initially, both Australia and the US spent half a day producing ethanol and half a day producing wheat. However, they now decide to specialise in producing the product that they have a comparative advantage and trade their products in the world market. What are the total gains from trade?

Answer 1

(b) Initially, both Australia and the US spent half a day producing ethanol and half a day producing wheat, so Australia will produce 25 barrels of ethanol and 15 tonnes of wheat a day, while the United States will produce 60 barrels of ethanol and 10 tonnes of wheat a day.
If they now decide to specialize in producing the product that they have a comparative advantage and trade their products in the world market, then Australia will produce 30 tonnes of wheat a day and USA will produce 120 barrels of ethanol a day. So, Australia will sell on the world market 15 tonnes of wheat and USA will sell on the world market 60 barrels of ethanol.
So, the total gains from trade are 15 - 10 = 5 tonnes of wheat and 60 - 50 = 10 barrels of ethanol.