Question

Support and Spain produce only doth and wine. Assume that each country is only labor to produce each good, and that the cloth and wine made in Italy and Spain are exactly alike. The table below shows how much each country can produce of each good with one hour of labor Output per Hour of Labor Wine Suppose that Taly and Spain do not trade with each other. Each has 500 hours of labor with which to produce cloth and wine, and the countries are currently producing amounts of each good shown in the table below: Consumption with 500 Hours of Labor 3.420 Asume now that each country in producing that good in which it has a comparative avantage. Further, assume for simplicity that one unit of cloth can be traded for one unit of wine are of contor 300 units of wine with Spain, then, wird Italy will be able to consume the same amount of wine and online of cloth tra numer o se sing an integer and Sant to consume the amount of cloth and son of wine

Answer 1

Solution:-

First we compute opportunity cost:-

Opportunity cost of cloth in Italy = 12 / 23 = 0.52 wine

Opportunity cost of cloth in Spain = 9 / 5 = 1.8 wine

With international trade, Italy produces only cloth and Spain produces wine only.

Italy produces (23 * 500 Hours of labour) = 11,500 clothes and consumes 11,500 – 600 = 10,900 clothes and Spain produces (9 * 500 Hours of labour) = 4500 wine and consumes 4500 - 600= 3900 wine

Italy consumes 11,500 – 10,350 = 1,150 additional units of cloth

Spain consumes 3,900 – 3,420= 480 additional units of wine.