Question

KFrance and Italy only trade with each other; (each country is only capable of producing 2 goods, Wine and Bread; (the production of Bread is relatively capital intensive, and the production of Wine is relatively labor intensive, and (France is relatively abundant in capital, while Italy.is relatively abundant in labor. All assumptions from our class about the Heckscher-Ohlin model hold, in particular the fact that both countries have identical homothetic preferences, constant returns to scale in production, the countries are the same size, etc... For the sake of consistency, put BREAD on the X-axis of any PPF graphs you might be inclined to draw. Q: A new discovery improves the Bread making production. This change increases potential output and also makes Bread production more capital intensive than before. In words and possibly with pictures, describe the impact of this change in technology on the two economies. You should be sure to include a discussion on the changes in the prices of goods and production factors. (Answer should be at least one paragraph in length.

Answer 1

The given information states that France is capital abundant and thus it produces the capital intensive good,i.e. bread. On the other hand, Italy is labour abundant and thus produces the labour intensive good which is wine. This is how both the countries trade with each other corresponding to their comparative advantages.

Now the question states that there is an improvement in the technology of bread making devices. Thus the output of bread in the production process would increase and it would be able to export more bread, earning more revenue. Thus the prices of bread would fall and its export revenue would rise as a result. The production factor such as labour is not rising in Italy and thus there is no increase in the output of wine but France gets a hike in its income share because it's production factor which is capital, is increasing/improving.

Weine in a technology 4 Newer PPF after increase & Quitial PPF Bread Staly France Wine "Bread Italy Scanned by TapScanner