Without trade, the United States produces and consumes 32,500 units of clothing and 125,000 cans of soda without trade; Brazil produces and consumes 50,000 units of clothing and 25,000 cans of soda. Denote these points on each countrys production possibility frontier. Using what you have learned and any independent research you may conduct, which product should each country specialize in, and why?
Obviously, the United States needs to specialize in soda cans if the country in the case where the country is consuming and manufacturing more than 125,000 which is far beyond the amount it produces and consumes in clothing. Whereas, Brazil needs to specialize in clothing since that country produces and consumes more clothing as compared to the soda cans at the rate of 50,000. The significance of a particular country specializing in a given product would be that the country would emerge being more self-sufficient. The major known repercussion of a country specializing in a specific product is because the producer would need to trade with the other countries so that it could be profitable. Although, if there were particular events whereby the producer could not provide the good it specializes in at the present price, here will be a shortage of it ((Dugger & Peach, 2015).
When countries or individuals specialize in items that they are competent at producing, it implied that they have lowest opportunity cost or that they are more efficient, therefore they can trade with the rest, and they will eventually have more than they could have if they tried to attempt to individually do everything. In the case whereby a country or a person has the lower opportunity cost in a specialized activity than the other country or person, then it will imply that the country has a competitive advantage in that. Take note that, a comparative advantage shows a region where specialization needs to take place so as to increase the total production. At that time, the goods that are specialized in may be traded for the other good. Even in the event when one party decides to do more of everything compared to their counterparts, both can still increase from trade and specialization because of the comparative advantage (Dugger & Peach, 2015).
What is the labor-intensive good?
The labor intensive good is cloth. Labor intensive good refers to the process that demands an enormous amount of labor for production. In this case, labor intensiveness between the two items, soda, and the cloths, is due to the much labor demand required for the production.
What is the Marginal Rate of Transformation impact?
The marginal rate of transformation refers to the rate that a particular product needs to be forgone for the sake of production of another additional unit of product, taking an assumption that both products need scarce balanced input (Sueyoshi & Goto, 2012). The US opportunity cost in creating the soda that is one unit less will consequently gain four units of clothing. Therefore, the Brazils marginal rate would be two to one.
What is the labor-abundant country?
A country is considered to be labor abundant when it is labor endowment is bigger as compared to the rest of the countries (Dugger & Peach, 2015). A country that has the comparative advantage, in this case, is Brazil, with regards to the production of the cloth which is being regarded as labor-intensive good. Therefore, this makes Brazil be a labor abundant country.
What is the capital-abundant country?
A country is considered to be labor abundant if its capital endowment is bigger as compared to the rest of the countries (Dugger & Peach, 2015). A country that has the comparative advantage, in this case, is the United States, with regards to the production of the cloth which is being viewed as capital-intensive good. Therefore this makes the United States be a capital-abundant country.
Could trade help reduce poverty in Brazil and other developing countries?
It is practically possible for trade to mitigate poverty experienced in Brazil together with the developing countries as long as it promotes to the increase in the actual wage of abundant factors in these nations (Vaghefi, Paulson, & Tomlinson, 1991). Since these countries are considered to be labor intensive, it means that the trade can promote in poverty alleviation in these countries through the increase of the real wage of labor.
How products and factor process and wages do eventually equalizes between the two countries?
Due to specialization, the product price would elevate while the other countrys wage would reduce. Because there is an assumption of the free trade, there will be the creation of equilibrium at a point of equalization between the factor wages and prices.
Dugger, W. M., & Peach, J. T. (2015). Economic abundance: an introduction. Routledge.
Sueyoshi, T., & Goto, M. (2012). Returns to scale, damages to scale, the marginal rate of transformation and rate of substitution in DEA environmental assessment. Energy Economics, 34(4), 905-917.
Vaghefi, M. R., Paulson, S. K., & Tomlinson, W. H. (1991). International business: theory and practice. Taylor & Francis.
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