Question 1

Assume that the two countries Japan and Italy both produce the cars Nissan GTR and Ferrari F12. The only variable input is labor, and the following table shows the number of cars produced per week: Italy : [GTR] 140 [F12] 120 Japan: [GTR] 100 [F12] 80

(a) Determine the trade pattern if you employ the theory of absolute advantage.

(b) Calculate the relative prices in autarky for both cars. Determine the trade pattern based on these prices and the theory of comparative advantage.

(c) What do we know about the international relative price on GTR?

(d) Assume that there are 5 workers in Italy that either can work in GTR production or F12 production. Draw the production possibilities frontier (PPF) for the two cars in Italy before trade.

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