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The Ricardian Model II Consider two countries, Spain and Russia, pro- ducing two goods, Vodka and Wine. Labor is the only factor of production and producing one liter of wine requires two hours of work in Spain and five in Russia. At the same time, the production of one liter of vodka requires two hours of work in both Spain and Russia. Wages in Spain are fifty percent higher than in Russia.

(a) What is the cost of producing wine in Spain relative to Russia? What is the cost of producing vodka in Spain relative to Russia?

(b) In absence of transportation costs will Spain and Russia trade? How will they specialize in the production of the two goods?

(c) Suppose now that transportation costs are equal to 100% of the production costs. What will happen to trade between Spain and Russia? Provide an analytic answer to your question.

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