Determining the Maximum Trade Ratio: South Korea and Japan

In international trade, countries engage in exchange based on their comparative advantages, aiming to maximize their welfare by specializing in and exporting goods in which they have a lower opportunity cost.

To determine the maximum amount of steel South Korea would be willing to export to Japan in exchange for each DVD, we must consider the concept of opportunity cost and the trade-offs involved in the exchange. The correct option is “c. Two tons of steel.”

Explanation of the Correct Answer:

c. Two Tons of Steel

To arrive at the correct answer, we need to consider the opportunity cost of producing each good in both South Korea and Japan. Let’s assume that South Korea can produce either one DVD or two tons of steel, while Japan can produce either one DVD or one ton of steel.

For South Korea, the opportunity cost of producing one DVD is two tons of steel (since they could produce two tons of steel instead of one DVD). Similarly, the opportunity cost of producing two tons of steel is one DVD (since they could produce one DVD instead of two tons of steel).

On the other hand, for Japan, the opportunity cost of producing one DVD is one ton of steel, and the opportunity cost of producing one ton of steel is one DVD.

Given this information, South Korea would be willing to export up to two tons of steel to Japan in exchange for each DVD. This is because at the maximum, South Korea could produce two tons of steel, which has the same value as one DVD in terms of opportunity cost. Therefore, the correct answer is “c. Two tons of steel.”

Explanation of Incorrect Options:

a. One-Half Ton of Steel

This option suggests that South Korea would be willing to export only half a ton of steel for each DVD. However, this does not align with the opportunity cost analysis provided earlier.

South Korea’s opportunity cost for producing one DVD is two tons of steel, making the exchange rate more favorable for Japan.

b. One Ton of Steel

This option implies that South Korea would be willing to export one ton of steel for each DVD. However, based on the opportunity cost analysis, this ratio would not be mutually beneficial for both countries.

South Korea would be better off producing DVDs, while Japan would be better off producing steel.

d. Two and One-Half Tons of Steel

This option suggests that South Korea would be willing to export two and a half tons of steel for each DVD. This ratio is not supported by the opportunity cost analysis. South Korea’s maximum willingness to trade for one DVD is two tons of steel.

In international trade, understanding opportunity cost is crucial in determining mutually beneficial exchange rates. In this scenario, South Korea would be willing to export up to two tons of steel in exchange for each DVD from Japan.

This trade ratio ensures that both countries maximize their welfare by specializing in the production of goods in which they have a comparative advantage. The other options provided do not accurately reflect the opportunity cost analysis and are therefore not the correct answers in this context.