The production possibilities curve demonstrates a model of an economy, especially on how trade between two countries is affected. In addition to comparative advantage, the production possibilities curve relates to international trade. A nation will have comparative advantage over the other in certain products/activities. Efficient production requires a nation to specialize in those activities it has comparative advantage (Suranovic, 2010) . The failure to allocate resources efficiently means that the world production falls inside the production possibilities curve.
In this scenario there are two products and two countries. Clothing and soda are both produced in Brazil and the United States. Brazil can produce 100,000 units of clothing and 50,000 cans of soda annually while the United States can produce 65,000 units of clothing and 250,000 cans of soda per year. Costs have been assumed to be constant. Each continent is assumed to have a linear production possibility curve. Each country also has a separate production possibility curve as shown below.
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| Brazil | USA | |||||
| Units of Clothing | Cans of Soda | Units of Clothing | Cans of Soda | |||
|
100000 |
0 |
65000 |
0 |
|||
|
50000 |
25000 |
32500 |
125000 |
|||
|
0 |
50000 |
0 |
250000 |
|||
Without trade, the USA will produce and consume 32,500 units of clothing and 125,000 cans of soda while Brazil will produce and consume 50,000 units of clothing and 25,000 cans of soda. These points have been denoted in their respective graphs below per country.
What is the marginal rate of transformation?
The marginal rate of transformation is the number of units of clothing that will be foregone in order to produce an extra can of soda whole keeping constant factors of production. In other words, this is the slope of the PPF curve and the opportunity cost (Suranovic, 2010)
MRT for Brazil = dx/dy = (0-50000)/ (100000-0) = -0.5
MRT for USA = dx/dy = (0-250000)/ (65000-0) = -3.846
The slope is the opportunity cost of producing a can of soda. It expresses the number of cans of soda must be given up in order to produce another unit of clothing per country. In this case, 0.5 cans of soda must be given up in order to produce one unit of clothing in Brazil while 3.846 cans of soda must be foregone in order to produce one unit of clothing.
A country has a comparative advantage in the production of a good if it can produce it at a lower opportunity cost as compared to the other country. When determining the opportunity cost of clothing, the reciprocal for the cans of soda can be used. Brazil’s opportunity cost of producing one unit of clothing is 2 while that of the USA is 0.26. Therefore, the USA has a comparative advantage over Brazil in clothing production. Brazil on the other hand has comparative advantage over the USA in production of cans of soda. Brazil can produce soda at a lower opportunity cost than the USA. In conclusion, Brazil should specialize in the production of soda because it has lower opportunity cost than the USA while the USA should specialize in production of clothing because less units of clothing have to be foregone in order to produce soda.
What is the labor intensive country?
The fixed input coefficients for labor and capital per unit of output have not been provided in the problem. A labor intensive country has more output of labor-intensive good and less output of the other good in a phenomenon known as the Rybczynski effect. However, using the developed vs. developing country theory, we can assume that Brazil is the labor intensive country.
Brazil is the less developed between both countries and therefore it is has a scarcity of capital due to low per capita income and the rate of capital formation is also slow. Labor is also readily available due to the high rates of unemployment (Xu, 2002)
What is the Capital-abundant country?
The capital abundant country is the USA. It is hypothesized that the relatively abundant factor in one country should be relatively cheaper compared to a second country. According to this definition, if the ratio of price of labor to the price of capital is lower in Brazil as compared to the USA, then the USA is the capital-abundant country. This is known as the Heckscher–Ohlin theorem whose critical assumption is that two countries are identical but differ in resources endowment.
How trade can help reduce poverty in Brazil and developing countries
Trade boosts development and reduces the poverty through the generation of growth, increased commercial opportunities and investments. It also facilitates export diversification hence allowing a developing country like Brazil to access new markets for its abundant goods and new materials which opens up new production possibilities. Competitiveness is also increased due to trade, and a developing country is able to reduce its cost inputs acquire finance through investments and move up the value global chain.
References
Suranovic, S. (2010). International trade: Theory and policy. The Saylor Foundation.
Xu, B. (2002). Capital Abundance and. Department of Economics, University of Florida , 1-15.
