Consider two countries, Spain and Italy, where the only two factors of production are capital and...

Consider two countries, Spain and Italy, where the only two factors of production are capital and labor. Spain has 100 units of capital and 400 units of labor and Italy has 200 units of capital and 100 units of labor. Both countries produce two goods, cheese and suits. The labor share in total production costs is 75% for cheese but only 25% for suits. (2 points for each part)

A. Which country is labor abundant? Explain. ( very helpful if explained using numbers or graphs for the following quiestions)

B. Which good is labor intensive? Explain.

C. What will happen to the relative price of cheese in Italy when the two countries open up to trade?

D. What will happen to the wage to rental rate ratio in Italy after opening up to international trade?

E. What will happen to the labor to capital ratio in the Italian cheese sector?

Expert Solution

Rahul Sunny answered 2 years ago

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Consider two countries, Spain and Italy, where the only two factors of production are capital and...

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