Consider the following model of trade between Iceland and Finland. There are two goods: Fish and Wheat. The only factor of production is labor. Each Icelandic worker can produce 1 unit of fish or 1 unit of wheat per unit of time, while each Finnish worker can produce 2 units of fish or 4 units of wheat per unit of time. There are 3 million workers in Iceland and 1 million in Finland. The relative demand in each country is given by
RD: . Note that since both countries have the same relative demand, this is also the world’s relative demand.
d. Derive the world relative supply curve and draw it on the same figure as you created for part c.
e. Compute the equilibrium relative price of fish under free trade, and draw the budget lines for a typical worker in each country. Which country produces which good(s)? Is there complete specialization? Who gains from trade?
f. Do these answers change if Iceland has 1 million workers instead of 3 million (and Finland still has 1 million)?