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...

Extracted 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?