SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each
Produces wine and bread; (3) The production of bread is
Relatively capital intensive, and the production of wine is
Relatively labor intensive, and (4) France is relatively
Abundant in capital, while Italy is relatively abundant in
Labor.
Reference: Ref 46
(Scenario: France and Italy) According to the HO model,
Free trade between Italy and France should cause:

Question

SCENARIO: FRANCE AND ITALY
(1) France and Italy only trade with each other; (2) each
Produces wine and bread; (3) The production of bread is
Relatively capital intensive, and the production of wine is
Relatively labor intensive, and (4) France is relatively
Abundant in capital, while Italy is relatively abundant in
Labor.
Reference: Ref 4­6
(Scenario: France and Italy) According to the HO model,
Free trade between Italy and France should cause:

Quizplus · Accepted Answer

According to the HO model, when two countries with different factor endowments trade with each other, the country that is relatively abundant in capital (France in this scenario) will specialize in the capital-intensive good (bread) and the country that is relatively abundant in labor (Italy in this scenario) will specialize in the labor-intensive good (wine). Therefore, free trade between France and Italy should result in an increase in the production of bread in France and an increase in the production of wine in Italy. As a result, the price of bread should decrease in Italy and the price of wine should decrease in France. Hence, the correct answer is D.