Italy and France each produce wine and cheese using labor as the only input. The

Question

Italy and France each produce wine and cheese using labor as the only input. The following table describes the number of bottles of wine and pounds of cheese that can be produced with an hour of labor in each country. Wine Cheese (bottles per labor -hour) (pounds per labor -hour) Italy 10 4 France 12 6 a) Which country has the absolute advantage in the production of wine? In the production of cheese? b) Which country has the comparative advantage in the production of wine? In the production of cheese? (Hint: think about the cost of making a product as the opportunity cost of not making the other product) c) In Italy, which group would lobby for free trade with the French, the wine makers or the cheese makers? Graph supply and What price can they get for their good if there is no free trade? What would happen to this price if Italy and France became trading partners?

Explanation / Answer

Part A:

France has absolute advantage for wine. 12 bottles to 10 bottles

France has absolute advantage of cheese. 6 pounds to 4 pounds.

Part B:

Comparative Advantage for Cheese:

Italy - 10 bottles of wine per 4 lbs of cheese. 10/4 = 2.5 bottles of wine for every pound of cheese

France - 12 bottle of wine per 6 pounds of chese. 12/6 = 2 bottles of wine for every pound of cheese

Therefore France has the comparative advantage for chesse since it's opportunity cost is lower.

Comparative Advantage for Wine:

Itally : 4 pounds of cheese for every 10 bottles of wine. 4/10 = .4 pounds of cheese for every bottle of wine

France 6 pounds of chese for every 12 bottles of wine. 6/12 = .5 pounds of cheese for every bottle of wine.

Therefore Italy has the comparative advantage for wine since it's opportunity cost is lower.

Part C

In Italy the wine makers have a comparative advantage so they would lobby for free trade. This would increase their exports and allow them to produce more.

If Italy and France become trading partners, the price of wine would rise some in Italy since they would be exporting it to France. This would be ofset by lower cheese prices on their imported cheese though.

Similarly, the price of wine would decrease in Frace and the price of cheese would increase because the demand is higher due to exports.

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