Answer to Question #212423 in Finance for anik

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.

(b) 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.

(d) Suppose that the relative demand for bread curve intersects with the world relative

supply curve at its vertical segment. What can you say about the trade equilibrium

relative price of bread? Which country produces which good or goods?

Is there complete specialization? Who gains from trade?

(e) How does your answer in (d) change if Holland’s population increases 10,000

times?

Answer 1

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