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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?

$\$ 5.01$

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Chapter 19

International Trade

Introduction

How Markets Work

Markets and Welfare

The Economics of the Public Sector

Topics for Further Study

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So even though we're talking about money and the production of phones, we can kind of treat this like a compared advantage absolute adventure problem, and draw the same kind of matrix. So for South Korea they produce 50,000,000 phones at $5 each, so the price of, um 50,000,000 phones would be five times 50,000,000 for Taiwan. They can produce 1,000,000 phones at $10 each, so the price would be $10 times 1,000,000. Um, and the number of phones would be 1,000,000. So in order to find out who has the compared advantage and what the price they would be willing to trade, that is, we have to find out who has, ah, the better opportunity cost. So the opportunity cost for South Korea would be equal to or would be that one phone is equal to $5. Opportunity caused for Taiwan is that one phone is equal to $10. So, um, in order for them to engage in trade, South Korea, at the price of the phone, has to be between two values. And for South Korea, they can make more money by selling the phones for a price greater than five. So it has to be greater than five. Not so it could be 5.0 They're one, and they would benefit from that trade. So that's the minimum price at South Korea would be willing to trade on. The maximum price that that Taiwan would be willing to trade is, um, under 10 because if it is over 10 they can produce those phones by themselves. So it has to be between five and 10. So the minimum price at which both countries will engage in trade is 5.0 is air whatever to the infinity one or something, it just has to be the tiniest bit.

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