Answer to Question #212083 in Finance for Tanzina Akter

Question

Consider a world consisting of two countries, Belgium and Holland. Belgium has

L=100 workers and Holland has L*=200 workers, the only input. There are two goods

– bread (B) and tulips (T).

In Belgium: MPLB=1 and MPLT =1/2, in Holland: MPL*

B = 1/2 and MPL*

T =1.

(a) Which country has a comparative advantage in which good?

(b) Draw the production possibilities frontier for each country. Draw the relative

supply of bread (B/T) curve for each country. Assume that each country has the same

downward-sloping relative demand for bread curve. What is the autarky equilibrium

relative price of bread in each country?

(c) Now derive and draw the world relative supply of bread curve.

Answer 1

a: Belgium has comparative advantage in tulips while Holland has comparative advantage in bread .

b: Belgium

Holland

c: