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 or goods? Is there complete specialization? Who gains from trade?
Consider the following model of trade between Iceland and Finland. Assume throughout that those two countries are the only two countries in the world, at least for purposes of trade. There are two goods: fish and wheat. Consumers always spend one fifth of their income on fish and the remainder on 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 1 million workers in Iceland and 1.5 million in Finland.