Suppose that there are two products: clothing and soda. Both Brazil and the United States produce each product. Brazil produces 100,000 units of clothing per year and 50,000 cans of soda. The United States produces 65,000 units of clothing per year and 250,000 cans of soda. Assume that costs remain constant. For this example, assume that the production possibility frontier (PPF) is a straight line for each country because no other data points are available or provided. Include a PPF graph for each country and product in your paper.
Complete the following:
- What would be the production possibility frontiers for Brazil and the United States?
- Without trade, the United States produces 45,000 units of clothing and 150,000 cans of soda.
- Without trade, Brazil produces 75,000 units of clothing and 30,000 cans of soda.
- Denote these points on each other’s production possibility frontier.
- Using what you have learned and any independent research you may conduct, which product should each country specialize in, and why? Additional questions to consider include the following:
- What is the labor-intensive good?
- What is the labor-abundant country?
- What is the capital-abundant country?
- Could trade help reduce poverty in Brazil and other developing countries?
- How do product and factor prices and wages eventually equalize between the two countries?