6. Optional exercise: Consider a world with two goods (beer and tulips). There are two countries (Belgium and the Netherlands) which have identical technologies and preferences. Assume that the production of tulips is relatively labor intensive while the production of beer is relatively capital intensive. Also, assume that in free trade equilibrium, Belgium only produces beer whereas the Netherlands produces both goods. (a) What can you say about the relative endowments of the two countries? Which trade theorem are you using to answer this question? (b) There is free capital movement between countries of the European Union. Will there be any movement of capital between the two countries? (c) If your answer to part (b) was affirmative, in which direction is capital going to flow? And, what will be the effect of this capital movement on production in both countries? Which trade theorem are you using to answer this question?

ENGR.ECONOMIC ANALYSIS
14th Edition
ISBN:9780190931919
Author:NEWNAN
Publisher:NEWNAN
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
icon
Related questions
Question
6. Optional exercise: Consider a world with two goods (beer and tulips). There are two countries
(Belgium and the Netherlands) which have identical technologies and preferences. Assume that
the production of tulips is relatively labor intensive while the production of beer is relatively
capital intensive. Also, assume that in free trade equilibrium, Belgium only produces beer
whereas the Netherlands produces both goods.
(a) What can you say about the relative endowments of the two countries? Which trade
theorem are you using to answer this question?
(b) There is free capital movement between countries of the European Union. Will there be any
movement of capital between the two countries?
(c) If your answer to part (b) was affirmative, in which direction is capital going to flow? And,
what will be the effect of this capital movement on production in both countries? Which
trade theorem are you using to answer this question?
Transcribed Image Text:6. Optional exercise: Consider a world with two goods (beer and tulips). There are two countries (Belgium and the Netherlands) which have identical technologies and preferences. Assume that the production of tulips is relatively labor intensive while the production of beer is relatively capital intensive. Also, assume that in free trade equilibrium, Belgium only produces beer whereas the Netherlands produces both goods. (a) What can you say about the relative endowments of the two countries? Which trade theorem are you using to answer this question? (b) There is free capital movement between countries of the European Union. Will there be any movement of capital between the two countries? (c) If your answer to part (b) was affirmative, in which direction is capital going to flow? And, what will be the effect of this capital movement on production in both countries? Which trade theorem are you using to answer this question?
Expert Solution
trending now

Trending now

This is a popular solution!

steps

Step by step

Solved in 3 steps

Blurred answer
Similar questions
  • SEE MORE QUESTIONS
Recommended textbooks for you
ENGR.ECONOMIC ANALYSIS
ENGR.ECONOMIC ANALYSIS
Economics
ISBN:
9780190931919
Author:
NEWNAN
Publisher:
Oxford University Press
Principles of Economics (12th Edition)
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education