Question

	Cloth	Fish	Cutlery
Italy	9 hr/unit	3 hr/unit	16 hr/unit
Switzerland	10 hr/unit	2.5 hr/unit	15 hr/unit

If the wage rate in Italy is 4 euro/hr and wage rate in Switzerland is 6 francs/hr and the exchange rate is 1.5 franc/euro,

a) What is the home country?

b) What will the trade pattern be?

c) If there is a transportation cost of 0.5 hr/commodity, then what will the trade pattern be?

Answer 1

a) Switzerland is the home country

b) the trade pattern will be based on comparative advantage. As Switzerland has comparative advantage in production of fish and cutlery  

unit	cloth (euro)	fish (euro)	cutlery(euro)
1	40 (60franc/1.5)	10 (15.0francs/1.5)	60(90/1.5)

while Italy has comparative advantage in production of cloth.

unit	cloth (euro)	fish (euro)	cutlery (euro)
1	36(9hr/unit * 4 euro/hr)	12 (3hr/unit* 4 euro/hr)	64 (16hr/unit* 4 euro/hr)

so switzerland will export fish and cutlery and import cloth while Italy will export cloth and will import fish and cutlery

C) if there is a transportation cost of 0.5hr/commodity , then Switzerland will only export fish and will import cloth and Italy will only import fish and export cloth.

*hope the answer will help you. please give feedback thank you