Consider two countries: South Korea and Taiwan. Taiwan can...

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?

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Key Concepts

Production Costs

This concept refers to the expense incurred in making a product. In the context of the question, each country’s cost to produce a mobile phone sets a baseline for the price at which they are willing to trade, with Taiwan’s cost at $10 per phone and South Korea’s at $5 per phone.

Comparative Advantage

Comparative advantage is the ability of a country to produce a good at a lower opportunity cost compared to another. Even if one country may have an absolute advantage in producing a mobile phone, trade hinges on whether each country can gain by specializing according to their relative efficiencies.

Trade Equilibrium (Minimum Trade Price)

The trade equilibrium price is the price level at which both parties are willing to engage in trade because it covers their production costs and allows potential gains from trade. In this scenario, the minimum price at which both countries are willing to trade is determined by the higher production cost, which is $10 per phone.

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