Reference no: EM133123762

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 (Sweden and Italy) are the only two countries in the world, at least for purposes of trade. There are two goods: computers and textiles. Consumers in both countries always spend half of their income on computers and half of their income on textiles. The only factor of production is labour. Each Swedish worker can produce 4 computers or 2 textiles per unit of time. Each Italian worker can produce 2 computers or 3 textiles per unit of time. There are 100 workers in the Sweden and 80 workers in Italy.

a) Which country has an absolute advantage in computers? In textiles?

b) Which country has a comparative advantage in computers? In textiles?

c) Draw the production possibility frontier for each country and indicate slope (put textiles on the vertical axis and computers on the horizontal axis).