Suppose Italy and Portugal produce only cloth and wine. Assume that each country uses only labor to produce each good, and that the cloth and wine made in Italy and Portugal are exactly alike. The table below shows how much each country can produce of each good with one hour of labor. Output per Hour of Labor Cloth Wine Italy 21 15 Portugal 3. 8. Suppose that Italy and Portugal do not trade with each other. Each has 1000 hours of labor with which to produce cloth and wine, and the countries are currently producing amounts of each good shown in the table below/ Consumption with 1000 Hours of Labor Cloth Wine Italy 18900 1500 Portugal 1500 4000 Assume now that each country specializes in producing the good in which it has a comparative advantage. Further, assume for simplicity that one unit of cloth can be traded for one unit of wine. If Italy trades 1500 units of cloth for 1500 units of wine with Portugal, then, with trade, Italy will be able to consume the same amount of wine and ? additional units of cloth, and Portugal will be able to consume the same amount of cloth and ? additional units wine. Ask a Question

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