International Trade Analysis Assignment: Italy and Sweden Report

This assignment analyzes international trade conditions between Italy and Sweden, focusing on data analysis and the application of economic models. The analysis includes the relationship between a country's openness and the Gini Index, examining the correlation between these factors in both Italy and Sweden. The Stolper-Samuelson theorem is discussed, considering how trade affects factor prices and specialization. The assignment then presents a technical analysis, calculating opportunity costs and relative supply and demand curves for calculators and shoes in both countries, determining the equilibrium under free trade. The benefits of free trade are highlighted by comparing outcomes with and without trade, showing how specialization increases overall production and consumption. The analysis demonstrates how trade can lead to gains for both countries, despite potentially widening the wage gap between skilled and unskilled workers.

Running head: INTERNATIONAL TRADE
International Trade
Name of the Student
Name of the University
Author Note

1INTERNATIONAL TRADE
Table of Contents
Data Analysis.............................................................................................................................2
Visual representation of openness and inequality..................................................................2
Correlation between Gini Index and Openness......................................................................3
Stolper Samuelson Theorem..................................................................................................3
Technical Analysis.....................................................................................................................4
Response to question a...........................................................................................................5
Response to question b...........................................................................................................6
Response to question c...........................................................................................................6
Response to question d...........................................................................................................8
Response to question e...........................................................................................................8
References..................................................................................................................................9

2INTERNATIONAL TRADE
Data Analysis
Visual representation of openness and inequality
32.5 33 33.5 34 34.5 35 35.5 36
45%
47%
49%
51%
53%
55%
57%
59%
Italy
Gini Index
Openness
Figure 1: Openness and Gini Index for Italy
25 25.5 26 26.5 27 27.5 28 28.5 29 29.5
70%
75%
80%
85%
90%
95%
Sweden
Gini Index
Openness
Figure 2: Openness and Gini Index for Sweden

3INTERNATIONAL TRADE
Correlation between Gini Index and Openness
A nation’s participation in free trade determines its degree of openness. The
magnitude of export and import together gives the measure of openness. Both the factors are
also part of GDP. On the other hand, Gini Index measures the extent of inequality of a
country (Ravallion, 2014). It also indirectly gives the comparative measures between skilled
and unskilled labour of a country. In Sweden, the correlation between Gini Index and
openness is 0.49. The correlation coefficient is positive and it indicates that the relation
between inequality and openness is positive. A positive relation between inequality and
openness indicates that with increase in openness, inequality increases. In case of Italy, the
value of coefficient of correlation is 0.26, indicating positive relation between inequality and
openness. Therefore, in Italy with increase in openness, inequality increases. In case of both
the countries, relation between inequality and openness is positive, however, the value of
coefficient for Italy is lower, showing a weak relationship between inequality and openness.
Conversely, the greater correlation coefficient of Sweden implies moderate relation between
inequality and openness (Lim & McNelis, 2014). Therefore, inequality of a country increases
with increasing openness. The ratio between wages of skilled to unskilled labour increases
with increase in Gini Index indicates that the ratio also increases with increase in openness.
Stolper Samuelson Theorem
The theory that explains the relationship between factor prices and relative price of
internationally traded goods is popularly known as Stolper Samuelson theorem. Hecksher-
Ohlin proposed this as one of the major theory of trade (Jäkel, & Smolka, 2013). The theory
states that return to the intensively used factor of production increases with rise in relative
price of the good. According to Hecksher-Ohlin theorem, both Sweden and Italy should
specialize in and export goods that are skilled labour intensive since it is given that both the
countries are intensive in skilled labour (Saboniene, Masteikiene & Venckuviene, 2013).

4INTERNATIONAL TRADE
Participation in international trade fetches high price for exported goods for both the
countries. Skilled labour is the intensive factor of production for both Sweden and Italy and
positive relation between openness and skilled to unskilled wage ratio indicates that with
increased openness return to intensive factor increases (McNabb & Said, 2013). Therefore, if
both the countries participate in trade reward to their intensive factors would be high. Hence,
the observations from the two countries supports the statement that increase in relative price
of a good increases the return to the input which is used intensively in production of the good.
Technical Analysis
Table 1: Unit labor requirement for production of Calculator and Shoe in Sweden and
Italy
Number of units /unit of
time
Calculator Shoe
Sweden 2 4
Italy 2 1
From the requirement of unit labour, the opportunity cost of producing shoe and calculator in
Sweden and Italy can be determined as follows
Table 2: Opportunity cost of production of shoe and calculator
Opportunity Cost Calculator Shoe
Sweden 4/2 = 2 2/4 = 1/2
Italy ½ 2/1 = 2
Shoe production gives comparative advantage to Sweden whereas calculator
production gives comparative advantage to Italy.

5INTERNATIONAL TRADE
Response to question a
Expression for calculator’s world relative demand is give as
RD= DC
I + DC
S
DS
I + DS
S =QC
QS
World relative price shares an inverse relationship with world relative demand as far
as theory of international trade is concerned. Therefore,
RD= 1
PC
PS
¿ , QC
QS
= 1
PC
PS
¿ , QC
QS
× PC
PS
=1
Thus, the shape of relative demand curve is found to be rectangular hyperbola (Viner 2016).
This is demonstrated in Figure 3,
Figure 3: Relative demand curve for calculator

6INTERNATIONAL TRADE
Response to question b
By achieving specialization in the goods in which Sweden and Italy have comparative
advantage influences the supply of shoe and calculator. Thus, total supply of Shoe is (60 * 4)
= 240 and total supply of calculator is (80 * 2) = 160.
Therefore, calculator’s relative supply is
QC
QS
=160
240 = 2
3
Figure 4: World relative supply of calculator
Response to question c
Trade between the two countries is possible only when the relative price lies within ½
and 2.
Italy will not have comparative advantage in calculator if (Pc/Ps) < 1/2. Thus, only
shoes will be produced by both the country.

7INTERNATIONAL TRADE
Sweden will not have comparative advantage in shoes if (Pc/Ps) > 2. Hence, both the
countries should produce calculators only.
Specializing in goods with comparative advantage is beneficial for countries only
when world relative price lies in between the ratios of domestic relative prices (Barattieri,
2014). Therefore, calculator’s world relative supply is 2/3. Considering, the inverse relation
between world relative quantity and world price, the world relative price at equilibrium is
( PC
PS )
W
= 1
( QC
QS )
W
¿ 1
2
3
¿ 3
2
¿ 1.5

8INTERNATIONAL TRADE
Figure 5: Equilibrium under free trade
Response to question d
In free trade condition, Sweden will specialize in shoes and produce only shoes as it
has comparative advantage in shoe production. Similarly, Italy will produce only calculators.
In Italy, 2 calculators are produced by 1 worker and in total there is 80 workers. Thus in free
trade condition total units of calculators produced is (80*2) =160.
In Sweden, 4 shoes are produced by 1 worker and in total there is 60 workers. Thus, in free
trade total number of shoes produced is (60*4) =240
Response to question e
During no trade condition, both the countries had to produce shoes and calculators by
themselves. Both Sweden and Italy will benefit from free trade because they specialize in the
goods in which the countries have comparative advantage. In autarky, Sweden can produce
and consume 120 shoes and 60 calculators while Italy produce and consume 40 shoes and 80
calculators. Consumption beyond PPF is not viable under autarky (Hazari, 2016). However,
trade enables both countries to consume beyond their PPF as world production of both
calculators and shoes increases (Poast, 2019). World relative price of calculators is much
more than the autarky relative price ratio that enables Italy to gain more than Sweden. In both
the countries, increased gain of skilled workers happens at the cost of unskilled workers
because the countries use skilled labour more intensively that increases the wage of skilled
labour. This happened because both the countries have abundant skilled labour.

9INTERNATIONAL TRADE
References
Barattieri, A. (2014). Comparative advantage, service trade, and global imbalances. Journal
of International Economics, 92(1), 1-13.
Hazari, B. (2016). The Pure Theory of International Trade and Distortions (Routledge
Revivals). Routledge.
Jäkel, I. C., & Smolka, M. (2013). Individual attitudes towards trade: Stolper-Samuelson
revisited. Open Economies Review, 24(4), 731-761.
Lim, G. C., & McNelis, P. D. (2014). Income inequality, trade and financial openness.
McNabb, R., & Said, R. (2013). Trade openness and wage inequality: Evidence for
Malaysia. The Journal of Development Studies, 49(8), 1118-1132.
Poast, P. (2019). Beyond the “Sinew of War”: The Political Economy of Security as a
Subfield. Annual Review of Political Science.
Ravallion, M. (2014). Income inequality in the developing world. Science, 344(6186), 851-
855.
Saboniene, A., Masteikiene, R., & Venckuviene, V. (2013). Lithuania’s export specialization
according to technological classification. Mediterranean Journal of Social
Sciences, 4(11), 346.