France and Italy only trade with each other. Each produces wine and bread. The production of bread is relatively capital intensive, and the production of wine is relatively labor intensive. France is relatively abundant in capital, while Italy is relatively abundant in labor. According to the Heckscher-Ohlin model, free trade between Italy and France should cause:

Question

Quizplus · Accepted Answer

According to the Heckscher-Ohlin model, countries will specialize in the production of goods in which they have a comparative advantage. In this case, Italy has a comparative advantage in the production of wine, which is labor-intensive, while France has a comparative advantage in the production of bread, which is capital-intensive. Therefore, Italy will specialize in the production of wine, and France will specialize in the production of bread. As a result, the supply of wine in the Italian market will increase, causing a decrease in the Italian price of wine. Similarly, the supply of bread in the French market will increase, causing a decrease in the French price of bread. Consequently, Italy will import bread from France, and France will import wine from Italy. Therefore, the Italian price of bread will decrease, and the French price of wine will also decrease. Thus, the correct answer is D.

France and Italy Only Trade with Each Other