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Chapter 20: Q 34. (page 495)

Consider two countries: South Korea and Taiwan.

Taiwan can produce one million mobile phones per day at the cost of \(10 per phone and South Korea can produce 50 million mobile phones at \)5 per phone. Assume these phones are the same type and quality and there is only one price. What is the minimum price at which both countries will engage in trade?

Short Answer

Expert verified

$5.

Step by step solution

01

Step 1. Definition

Absolute advantage is defined as the capability of an economy or an individual or a company to produce more quantity of goods and services with the same given number of inputs per unit of time or using less quantity.

02

Step 2. Explanation

The minimum price at which both countries will trade is $5 because South Korea will trade with Taiwan only at a price which is above $5 because this is their production cost and minimum trade price. And on the other hand, Taiwan will import phones from South Korea only when the price is below $10 because, at more than $10, they will produce their own phones. So, the minimum price at which both Taiwan and South Korea will trade is $5 only.

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Most popular questions from this chapter

Table 20.15 shows how the average costs of production for semiconductors (the “chips” in computer memories) change as the quantity of semiconductors built at that factory increases.

a. Based on these data, sketch a curve with quantity produced on the horizontal axis and average cost of production on the vertical axis. How does the curve illustrate economies of scale?

b. If the equilibrium quantity of semiconductors demanded is 90,000, can this economy take full advantage of economies of scale? What about if quantity demanded is 70,000 semiconductors? 50,000 semiconductors? 30,000 semiconductors?

c. Explain how international trade could make it possible for even a small economy to take full advantage of economies of scale, while also benefiting from competition and the variety offered by several producers.

You just overheard your friend say the following: “Poor countries like Malawi have no absolute advantages. They have poor soil, low investments in formal education and hence low-skill workers, no capital, and no natural resources to speak of. Because they have no advantage, they cannot benefit from trade.” How would you respond?

Under what conditions does comparative advantage lead to gains from trade?

In France, it takes one worker to produce one sweater, and one worker to produce one bottle of wine. In Tunisia, it takes two workers to produce one sweater, and three workers to produce one bottle of wine. Who has the absolute advantage in the production of sweaters? Who has the absolute advantage in the production of wine? How can you tell?

Can a nation’s comparative advantage change over

time? What factors would make it change?
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