Suppose that there are two products: clothing and soda. Both Brazil and the United States produce each product. Brazil can produce 100,000 units of clothing or 50,000 cans of soda per year. The United States can produce 65,000 units of clothing or 250,000 cans of soda per year. Assume that costs remain constant.
What would be the production possibility frontiers for Brazil and the United States?
- Without trade, the United States produces 52,000 units of clothing and 50,000 cans of soda.
- Without trade, Brazil produces 50,000 units of clothing and 25,000 cans of soda.
- Denote these points on each other's production possibility frontier.
What is the marginal transformation rate for each country?
- Should the two countries specialize and trade?
- If so, who has the comparative advantage in what product?
- Once they specialize, how much does output increase?
Are the consumers in each country better off after trade?
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?