Question

In order to conjecture the circumstances in these two countries under autarky (when there is no trade), consider the following hypothetical scenario based on Ricardian model. Assume throughout that those two countries (Italy and Sweden) are the only two countries in the world, at least for purposes of trade. There are two goods: shoes and calculators. Consumers in both countries always spend half of their income on shoes and half of their income on calculators. The only factor of production is labour. Each Italian worker can produce 1 shoe or 2 calculators per unit of time. Each Swedish worker can produce 4 shoes or 2 calculators per unit of time. There are 80 workers in Italy and 60 workers in Sweden. You need to provide conditions in each country by stating: (please show all the step of the calculations) Which country has an absolute advantage in shoes? In calculators? Which country has a comparative advantage in shoes? In calculators? Draw the production possibility frontier for each country and indicate slope (put shoes on the vertical axis and calculators on the horizontal axis). Find the autarky relative price of calculators in both countries (i.e., the price of calculators divided by the price of shoes). What is the optimal consumption and production for each country under autarky?

Answer 1