Assume we are in a Ricardian world where there are only two countries: England and Portugal. These countries produce two goods: cloth (C) and wine (W). Table 1 reports some information regarding each country’s technology, wages and prices in autarky.
Continuing from question 1, assume that countries are free to trade and that the world relative price of C is equal to 1.
Italy and Australia produce wine (W) and guitars (G). Guitars are produced using capital and labor. Wine is produced using land and labor. Labor is mobile between sectors within a country. Italy is relatively abundant in capital, while Australia is relatively abundant in land. Consumers’ preferences are the same in Italy and Australia.
Now, suppose Italy and Australia are free to trade.
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