Reference no: EM132834534

You are required to conjecture (speculate) the circumstances in these two countries (Italy and Sweden) under autarky (when there is no trade) and also under international 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: wine and cheese. Consumers in both countries always spend half of their income on wine and half of their income on cheese. The only factor of production is labour. Each Italian worker can produce 1 wine or 2 cheeses per unit of time. Each Swedish worker can produce 4 wine or 2 cheeses 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:

a) Now suppose that cheese sells for $6 a pound, while wine sells for $8 a gallon in both countries. What will the workers produce in Italy and Sweden? Explain your answers.

b) Explain how Italy and Sweden can gain from trade.