If Hong Kong and Taiwan have identical production possibilities curves that are subject to increasing opportunity costs:
|a. Trade would depend on differences in demand conditions|
b. Trade would depend on economies of large-scale production
c. Trade would depend on the use of different currencies
d. There would be no basis for gainful trade
The Correct Answer Is:
a. Trade would depend on differences in demand conditions
b. Trade would depend on economies of large-scale production:
The idea behind economies of scale is that as production volume increases, the average cost per unit decreases. This can lead to competitive advantages for larger producers.
However, in the context of identical production possibilities curves between Hong Kong and Taiwan, it implies that both countries face similar cost structures and do not necessarily benefit from economies of scale differently.
If the production possibilities curves are identical, the cost of production is likely to be similar for both countries, making economies of large-scale production a less decisive factor in determining trade.
c. Trade would depend on the use of different currencies:
The use of different currencies is a factor in international trade, but it is not directly related to the concept of production possibilities curves. Trade can occur between countries with the same or different currencies.
Currency differences might affect exchange rates and transaction costs, but they don’t have a direct impact on the comparative advantage or production capabilities of the countries involved. The primary determinants of trade in this scenario are the production possibilities and demand conditions, rather than the use of different currencies.
d. There would be no basis for gainful trade:
This statement is incorrect because identical production possibilities curves do not necessarily mean there is no basis for gainful trade. The key factor for trade in this scenario is the differences in demand conditions.
Even if the production possibilities are the same, differences in consumer preferences and demands can create opportunities for specialization and trade.
The concept of comparative advantage, which is fundamental to international trade theory, suggests that countries can benefit from trading goods and services in which they have a comparative advantage, even if their absolute production capabilities are identical.
In summary, the main reason why these options are not correct lies in the fact that identical production possibilities curves do not preclude the possibility of gainful trade. Trade can still be beneficial if there are differences in demand conditions, allowing countries to specialize in the production of goods that align with their comparative advantage.
The focus in this scenario is on the interplay between comparative advantage and demand conditions rather than factors like economies of scale or the use of different currencies