Italy and Spain are two countries that are reasonably similar in terms of their endowments

and their GDP. Wine manufacturers in each country are assumed to compete under

monopolistic competition. Suppose the two countries engage in trade.

(a) What is likely pattern of trade between these two countries? Which country is

expected to import or export wine? Explain your answer.

(b) Explain in WORDS how Krugman's trade theory pertains to this scenario.

(c) Explain how the benefits to consumers from international trade, as predicted by

this model, are different from those explained by the traditional models of trade.

YOU FIRST NEED TO EXPLAIN THE KRUGMAN'S MODEL IN DETAILS

USING AN APPROPRIATE DIAGRAM.