Consider the following model of trade between iceland and finland. there are two goods: fish and wheat. the only factor of production is labor. each icelandic worker can produce 1 unit of fish or 1 unit of wheat per unit of time, while each finnish worker can produce 2 units of fish or 4 units of wheat per unit of time. there are 3 million workers in iceland and 1 million in finland.
rd: .note that since both countries have the same relative demand.
the world’s relative demand.
a. which country has an absolute advantage in fish? in wheat? which country has a comparative advantage in fish? in wheat?
b. find the relative price of fish in both countries when there is no trade (each country is isolated). express the relative price as the price of fish divided by the price of wheat. draw the typical worker’s budget line in both countries.
c. graph the relative demand in a diagram with the relative price of fish on the vertical axis and the relative quantity of fish on the horizontal axis.
d. derive the world relative supply curve and draw it on the same figure as you created for part c.
e. compute the equilibrium relative price of fish under free trade, and draw the budget lines for a typical worker in each country. which country produces which good(s)? is there complete specialization? who gains from trade?
f. do these answers change if iceland has 1 million workers instead of 3 million (and finland still has 1 million)?
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Consider the following model of trade between iceland and finland. there are two goods: fish and wh...
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