The United States can produce 1,000 shoes if it specializes in shoe production. Alternatively, it can produce 500 shirts. Taiwan can produce 500 shoes or 200 shirts. Explain which country will specialize in shoe production and which in shirt production. What are the possible terms of trade?
What will be an ideal response?
The United States has the lower opportunity cost for shirts, sacrificing 2 shoes per shirt vs. Taiwan sacrificing 2.5 shoes per shirt. Taiwan will specialize in shoes. Using the opportunity cost of shirts, the U.S. will produce shirts and trade them to Taiwan for between 2 and 2.5 shoes per shirt.
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