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