Answer to Question #212468 in Macroeconomics for Meem

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.

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

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?

Answer 1

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