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econ310-1403a-01_individualproject_phase2.docxRUNNINGHEADER:PRODUCTIONPOSSIBILITYFRONTIER 1
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Table of Contents Abstract 3 Introduction 4 What would be the production possibility frontiers for Brazil and the United States? 4 Production Possibilities for Two Countries 4 Denote these points on each other’s production possibility frontier. 4 Without trade, the United States produces 45,000 units of clothing and 150,000 cans of soda. 4 Figure 1 4 Without trade, Brazil produces 75,000 units of clothing and 30,000 cans of soda. 5 Figure 2 5 What is the marginal transformation rate for each country? 6 Should the two countries specialize and trade? 6 If so, who has the comparative advantage in what product? 7 Figure 3 7 Comparative Advantage and Gains from Trade 8 Figure 4 8 Once they specialize, how much does output increase? 8 What are the terms of trade if the United States trades 1 can of soda for 5 units of clothing? 9 U.S. vs. Brazil – Absolute vs. Comparative 9 Figure 5 9 Are the consumers in each country better off? 9 What is the labor-intensive good? 10 What is the labor-abundant country? 10 Could trade help reduce poverty in Brazil and other developing countries? 11 How do product and factor prices and wages eventually equalize between the two countries? 11 Conclusion 11
Abstract
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.
Introduction
Production possibility frontier will be referred to as PPF through the rest of this paper. PPF shows the trade-offs facing an economy that produces only two goods. It displays the maximum quantity of one good that can be produced verses the given production of the other good. The PPF will help improve our understanding of trade-offs. As we take into consideration that a simplified economy that produces only two goods. I’ll be showing the comparisons’ of these trade-offs graphically.
What would be the production possibility frontiers for Brazil and the United States?
Production Possibilities for Two Countries
Denote these points on each other’s production possibility frontier.
Without trade, the United States produces 45,000 units of clothing and 150,000 cans of soda.
In each country there exists a constant opportunity cost of clothing and soda with each there is a straight-line production possibility frontier. In the U.S.’s case, each soda can have an opportunity cost of 3⁄10 of a piece of clothing
10
Figure 1Quantity of Soda cans
U.S. consumption without trade
8
0
30
6
Quantity of Clothing
U.S. PPF
Without trade, Brazil produces 75,000 units of clothing and 30,000 cans of soda.
As stated previously each country there is a constant opportunity cost of clothing and soda and a straight-line production possibility frontier. In Brazil’s case, each article of clothing has an opportunity cost of 4/10 of a soda can.
Figure 2
Quantity of
Clothing
10
Brazil Consumption without trade
8
40
Brazil PPF
6
0
Quantity of Soda
What is the marginal transformation rate for each country?
Marginal transformation rate is the level of sacrifice that needs to be given to produce one good over the other. In this case it’s the marginal rate of clothing verses the production of soda. In essence by producing more of one good at the cost of producing the other because the resources are efficiently allocated between the two goods. In this case the marginal transformation rate is 3/10 or 3 units of clothing is equal to 10 cans of soda. In Brazil’s case it is 4/10 4 cans of soda to 10 units of clothing.
Should the two countries specialize and trade?
Both countries are better off when they each specialize in what they are good at and then trade. It’s a good idea for Brazil to make the clothing articles for both of them, because its opportunity cost of a clothing articles in terms of soda cans made is only 4/10 of clothing articles, versus 3/10 soda cans for the United States. Correspondingly, it’s a good idea for the United States to make soda cans for both of them.
If so, who has the comparative advantage in what product?
Figure 3
Brazil’s Production & Consumption
U.S. Production & Consumption
U.S. Production
With trade
Soda
Soda
30
U.S. Consumption
Without trade
U.S Consumption
With trade
Brazilian Consumption with trade
Brazilian Consumption without trade
10
20
Brazilian Production with trade
8
18
U.S. PPF
Brazilian PPF
6
16
40
20
30
10
0
0
Clothing
Clothing
Comparative Advantage and Gains from Trade
By specializing and trading, the two countries can produce and consume more of both goods. Brazil specializes in making clothing, its comparative advantage, and US specializes in making soda. The result is that each country can consume more of both goods than either could without trade.
Figure 4
|
|
Without Trade |
With Trade |
Gains from trade |
|||
|
|
|
Production |
Consumption |
Production |
Consumption |
|
|
U.S. |
Clothing |
6 |
6 |
0 |
10 |
+4 |
|
|
Soda
|
8
|
8
|
30
|
10
|
+2
|
|
Brazil |
Clothing |
6 |
6 |
30
|
20 |
+4 |
|
|
Soda |
8 |
8 |
0 |
20 |
+2 |
Once they specialize, how much does output increase?
Both the United States and Brazil experience gains from trade. U.S. consumption of Clothing increases by two, and its consumption of soda increases by four. Brazilian consumption of soda increases by two, and his consumption of clothing increases by four.
What are the terms of trade if the United States trades 1 can of soda for 5 units of clothing?
An individual has a comparative advantage in producing a good or service if the opportunity cost of producing the good is lower for that individual than for other people. An individual has an absolute advantage in an activity if he or she can do it better than other people. Having an absolute advantage is not the same thing as having a comparative advantage.
U.S. vs. Brazil – Absolute vs. Comparative
The Brazil has an absolute advantage in clothing: it can produce more output with a given amount of input (in this case, its time) than United States. But we’ve just seen that the United States can indeed benefit from a deal with Brazil because comparative, not absolute, advantage is the basis for mutual gain. So Brazil, despite its absolute advantage, has a comparative advantage in clothing. Meanwhile the United States, which can use its time better by making soda, has a comparative disadvantage in making clothes.
Figure 5
|
|
U.S. Opportunity cost |
|
Brazilian Opportunity cost |
|
One Clothing |
1 Soda cans |
< |
5 |
|
One Soda |
3 |
> |
15/3 Clothing |
Are the consumers in each country better off?
Poor countries when compared to richer countries tend to have a relatively larger clothing industry. In addition, poor countries have low productivity in the clothing sector, but the sector has higher comparative advantage because their productivity in non-clothing sectors is even lower. So in the end the consumer is better off by trading and producing the good that they have absolute advantage in. Trade expands choice and lowers prices for consumers by broadening supply sources of goods and services and strengthening competition.
What is the labor-intensive good?
Labor intensive good is defined as the production of goods and services requires labor and capital in varying amounts. If the labor cost outweighs the capital cost, it indicates that the production process is labor intensive. For example, manufacturing clothing is considered labor intensive because a majority of production costs are related to paying workers. So in this case clothing is the labor intensive good. Keep in mind this can be variable because workers can be added and subtracted depending upon demand and or season.
What is the labor-abundant country?
In this case the determination of the more labor abundant country came down to wages paid to workers. Since the United States and Brazil both has a huge supply of available workers it came down to the price of minimum wage in each country. After factoring in this information Brazil is the more labor-abundant country.
What is the capital-abundant country?
The United States is clearly the more Capital-abundant country since it makes more that Brazil does in country revenue.
Could trade help reduce poverty in Brazil and other developing countries?
Trade can help reduce poverty in Brazil and other developing countries like it in a number of ways. First, trade helps by boosting development and reduces poverty by generating growth through increased commercial opportunities and investment. Secondly, trade helps by broadening the local market productive base through private sector development. Lastly, trade helps by Trade facilitates export diversification by allowing developing countries to access new markets and new materials which open up new production possibilities. As I have stated the benefits are endless I could name more but for the sake of time will stop there.
How do product and factor prices and wages eventually equalize between the two countries?
During economic downturns, this can be an advantage over capital intensive producers, which normally have higher fixed costs.
Conclusion
One of the major assumptions in economic models is that the other things equal assumption. This allows analysis of the effects of a change of one factor and keeping all other relevant factors unchanged. The next, economic model in line is the production possibility frontier. It illustrates: opportunity cost, efficiency, and economic growth. There are two basic sources of growth: an increase in factors of production resources such as land, labor, capital, and human capital, inputs that are not used up in production and improved technology.
Reference
Carson, N., & Tsigaris. (2011). Illustrting Enviornmental Issues by using Production Possibiity-frontier. Journal of Economic Education, p243-254.
Dalal, A. J. (2006). The Production Possibility Frontier as a Maximum Value Function: Concavity and Non-increasing Returns to Scale. Review of International Economics, p958-967.
Inoue, T. (86). ON THE SHAPE OF THE WORLD PRODUCTION POSSIBILITY FRONTIER WITH THREE GOODS AND TWO PRIMARY FACTORS WITH AND WITHOUT CAPITAL MOBILITY. . International Economic Review, p707.
Salvatore. (2013). International Economics. Edition 11: Wiley.
