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Chapter 19: Q. 34 (page 463)

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

Step1. Introduction

Trade between countries occur if there exists advantages or trade gains.

Following is the given information regarding the two countries:


Quantity producedPrice
South Korea50 million$5
Taiwan1 million$10
02

Step2. Explanation

South Korea can produce more quantities in a day and at a cheaper rate.

So, Taiwan must import from South Korea.

South Korea would export phones for a minimum of $5 because that is what is the cost of production it is incurring.

Taiwan would import phones for a maximum of $10 because otherwise Taiwan can themselves produce the phones.

Hence, the minimum price at which the trade can happen is $5.

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Most popular questions from this chapter

France and Tunisia both have Mediterranean climates that are excellent for producing/harvesting green beans and tomatoes. In France it takes two hours for each worker to harvest green beans and two hours to harvest a tomato. Tunisian workers need only one hour to harvest the tomatoes but four hours to harvest green beans. Assume there are only two workers, one in each country, and each works 40 hours a week.

a. Draw a production possibilities frontier for each country. Hint: Remember the production possibility frontier is the maximum that all workers can produce at a unit of time which, in this problem, is a week.

b. Identify which country has the absolute advantage in green beans and which country has the absolute advantage in tomatoes.

c. Identify which country has the comparative advantage.

d. How much would France have to give up in terms of tomatoes to gain from trade? How much would it have to give up in terms of green beans?

You just got a job in Washington, D.C. You move

into an apartment with some acquaintances. All your roommates, however, are slackers and do not clean up after themselves. You, on the other hand, can clean faster than each of them. You determine that you are 70% faster at dishes and 10% faster with vacuuming. All of these tasks have to be done daily. Which jobs should you assign to your roommates to get the most free time overall? Assume you have the same number of hours to

devote to cleaning. Now, since you are faster, you seem to get done quicker than your roommate. What sorts of problems may this create? Can you imagine a trade-related analogy to this problem?

In Germany it takes three workers to make one television and four workers to make one video camera. In Poland it takes six workers to make one television and 12 workers to make one video camera.

  1. Who has the absolute advantage in the production of televisions? Who has the absolute advantage in the production of video cameras? How can you tell?

  2. Calculate the opportunity cost of producing one additional television set in Germany and in Poland. (Your calculation may involve fractions, which is fine.) Which country has a comparative advantage in the production of televisions?

  3. Calculate the opportunity cost of producing one video camera in Germany and in Poland. Which country has a comparative advantage in the production of video cameras?

  4. In this example, is absolute advantage the same as comparative advantage, or not?

  5. In what product should Germany specialize? In what product should Poland specialize?

From earlier chapters you will recall that technological change shifts the average cost curves. Draw a graph showing how technological change could influence intra-industry trade.

What is splitting up the value chain?
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