Use the following information from the table provided below to answer the questi

Question

Use the following information from the table provided below to answer the questions below:

                                                                    Italy                Taiwan

Soft drink cans produced per hour               2                        16

Snowboards produced per hour                   4                         8

a) Compute the range of the international relative price of soft drink cans at which the two countries would trade.

b) Suppose that discovery of a new method of production (technological progress) in Italy doubles the marginal product of labor in snowboards. Would the two countries Italy and Taiwan continue to trade? Provide a brief explanation.

Explanation / Answer

(a) We first compute opportunity costs (OC).

OC of soft drink in Italy = 4 / 2 = 2 snowboards

OC of soft drink in Taiwan = 8 / 16 = 0.5 snowboards

International relative price of soft drink will range between 0.5 to 2 snowboards.

(b) As MPL in snowboards doubles in Italy, number of snowboards per hour doubles from 4 to 8.

New OC of soft drink in Italy = 8 / 2 = 4 snowboards

Since OC of soft drinks is unchanged in Taiwan and is lower than that in Italy, Taiwan can still produce soft drinks at a lower OC than Italy can, and the countries will trade.

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