Question

1. Assume that there are totally 800 units of resources in both Italy and Portugal. The resources required to produce tomatoes and grapes in Portugal and Italy, as well as production and consumption without trade, are shown as below.

           Table 1 Resources Required to Produce 1 Ton of Tomatoes and Grapes

	1 ton of grapes	1 ton of tomatoes
Portugal	20	25
Italy	80	40

Table 2 Production and Consumption without Trade ( unit: tons)

	Grapes	Tomatoes
Portugal	30	8
Italy	5	10

1. Which country has absolute advantage in the production of tomato?

2. Which country has comparative advantage in the production of grape?  

3. What should Portugal and Italy specialize in the production of? Please calculate the production with specialization and show your results in the table below.

Table 3 Production with Specialization

	Grapes	Tomatoes
Portugal
Italy

4. 10 tons of tomatoes from Italy and 10 tons of grapes from Portugal are available for trade.         In Table 4 below, please show the consumptions after trade.

Table 4 Consumption after trade   

	Grapes	Tomatoes
Portugal
Italy

5. What are the gains of Portugal and Italy from this specialization and trade?

6. Is international trade a zero-sum game? Please briefly explain why or why not.

Answer 1

a) Portugal has absolute advantage in production of tomato (lesser resources required)

b) Opportunity cost of producing 1 ton of grapes (Portugal) = 20/25 = 0.8 tons of tomatoes

Opportunity cost of producing 1 ton of grapes (Italy) = 80/40 = 2 tons of tomatoes

Portugal has comparative advantage in production of grape (lower opportunity cost)

c) Portugal would specialize in production of grapes while Italy would specialize in production of tomatoes. (countries would specialize in the good where they have a comparative advantage)

	Grapes	Tomatoes
Portugal	40	0
Italy	0	20

d) Consumption after trade:

(10 Grapes exchanged for 10 Tomatoes)

	Grapes	Tomatoes
Portugal	30	10
Italy	10	10

e)

Gains = Consumption after trade - Consumption before trade

	Grapes	Tomatoes
Portugal	0	2
Italy	5	0

f) No, international trade is not a zero sum game, specialization and trade leads to better utilization of resources and their are gains from international trade. (As can be seen in part e) above)