Question
Assume a world with two countries (Australia and Solomon Islands) and two goods (wine and computers). Assume also that Australia has a comparative advantage in
Assume a world with two countries ("Australia" and "Solomon Islands") and two goods (wine and computers). Assume also that Australia has a comparative advantage in wine production. Using the Ricardian model of trade, draw, and carefully explain, a diagram depicting global equilibrium if relative demand for wine in the world is such that it makes sense for each country to specialize. (In your diagram, put the price of wine relative to computers on the vertical axis and the quantity of wine relative to computers on the horizontal axis). What would happen to equilibrium if Solomon Islands suddenly became significantly more efficient at computer production?
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