Suppose that there are two products: clothing and soda. Both Brazil and the United States produce each product. Brazil can produce 100 units of clothing per year and 50 units of soda (where units are thousands of cans). The United States can produce 65 units of clothing per year and 250 units 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.  What would be the production possibility frontiers for Brazil and the United States? (Without trade, the United States produces AND CONSUMES 32.5 units of clothing and 125 units of soda. Without trade, Brazil produces AND CONSUMES 50 units of clothing and 25 units of soda.) Which product should each country specialize in, and why? What is the labor-intensive good? What is the Marginal Rate of Transformation impact? What is the labor-abundant country? What is the capital-abundant country? Could trade help reduce poverty in Brazil and other developing countries?

In this example the United States should specialize in soda and Brazil should specialize in clothing, as they have larger capacities for manufacturing these products. The most labor- or capital-abundant country would depend on the amount of labor and costs necessary to create each specific product. Brazil could theoretically reduce poverty through trade if it had a surplus of specialized product.

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The question is one of production specialization and illustrates what Adam Smith advocated: that by specializing in products where there is a competitive advantage, each country can improve its own productivity to the benefit of both. Telling us that units of soda equal thousands of cans does not add much to our understanding of productivity so for the purposes of this question, we should disregard that detail.

Brazil can produce 100 units of clothing per year and 50 units of soda. The U.S. can produce 65 units of clothing per year and 250 units of soda. This means that the U.S. produces only 65% as much clothing as Brazil produces each year, but five times as much soda. Conversely, Brazil produces 154% as much clothing, but only 20% as much soda.

This implies that the U.S. should forego the manufacture of clothing and let Brazil take care of that, while it (the U.S.) specializes in the more capital intensive manufacture of soda, which it can complete at five times the rate of Brazil.


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