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ECON310 Global Managerial Economics

Unit  - Individual Project

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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 per year and 50,000 cans of soda. The United States can produce 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 in your paper. Chapter 5 of the Suranovic text is a good reference for this task.

Complete the following:

What would be the production possibility frontiers for Brazil and the United States?

Answer: The PPF (Production possibility Frontier) also known as product transformation curve is a graphical representation that indicates the maximum output an economy can achieve by using its available resources effectively and efficiently on combination of two goods or services and having only one choice between the two. The PPF graph helps a country in deciding which commodity to sacrifice and which to produce which will be beneficial taking into account relevant factors.

Now, Assume A = Soda and B = Clothing (for the assignment)

In case of Brazil, it can produce 100,000 clothing units per year or 50,000 soda cans per year.

Therefore, its PPF is given by:

2A+B = 100,000

Because when B = 0, A = 50,000 (so that 2A = 100,000) and when A = 0, B= 100,000.

Similarly, In case of US, it can produce 65,000 clothing units per year or 250,000 soda cans per year.

Thus, its PPF is given by:(65,000/250,000)A + B = 65,000

Because when B = 0, A = 250,000 and when A = 0, B = 65,000

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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.

Answer: In absence of trade, the United States produces 32,500 units of clothing and 125,000 cans of soda. Below graph represents, PPF for the United States where the point on X axis (horizontal line) is 32,500 and the point on Y axis (vertical line) is 125,000. The value of these points is half of the PPF line, where the total production of clothing is 65,000 units and soda is 250,000 cans.

PPF for USA.jpg

Denote these points on each COUNTRY’s production possibility frontier.

Answer: In absence of trade, Brazil produces 50,000 units of clothing and 25,000 cans of soda. Below graph represents, PPF for Brazil where the point on X axis (horizontal line) is 50,000 and the point of Y Axis (vertical line) is 25,000. The value of these points is half of the PPF line, where the total production of clothing is 100,000 units and soda is 50,000 cans.

PPF for Brazil.jpg

Using what you have learned and any independent research you may conduct, which product should each country specialize in, and why?

Answer: After analysis of the production process of both countries in accordance with the concept of comparative advantage, we reach to the conclusion that :

United States should specialize in soda production since per unit cost of soda in US (32,500/125,000) equals 0.26 units of clothing whereas in Brazil it costs (50,000/25,000) 2 units of clothing.

Similarly, Brazil should specialize in Clothing production as per unit of cost of clothing in Brazil is (25,000/50,000) 0.5 can of soda whereas in United States it costs (125,000/32,500) 3.85 can of soda.

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To assist in your thinking and discussion, additional questions to consider include:

What is the labor-intensive good?

Answer: When a good is required to undergo processes which require a large number of labor forces to indulge in its manufacturing, the good is termed as labor intensive good. Labor intensive goods majorly rely on using labor resources but provides lesser opportunities for economies of scale as well as quality. Clothing is surely the labor intensive good in the mentioned case since its production undergoes various stages with requirement of various kind of labor at every stage and soda cans on the other hand undergoes automated processes where there is very less requirement of labor.

What is the Marginal Rate of Transformation impact?

Answer: The marginal rate of transformation is closely related to Opportunity cost and an increasing marginal rate of transformation will end up in increasing opportunity cost and vice versa. It refers to the amount of good sacrificed to the amount of good obtained and is denoted by the formula as  ratio of number of goods sacrificed / the ratio of number of goods obtained, in two goods economy, by keeping all other production factors uniform. Marginal rate of transformation helps industries/countries to take decisions as to which products to sacrifice and which to produce.

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What is the labor-abundant country?

Answer: A labor abundant country is a country where the amount of labor is very high in comparison to other countries and at a relatively cheaper rate which also gives a comparative advantage to the county with abundance of labor and this advantage can even be used by the country to produce labor intensive goods. Labor abundant countries have advantage over other countries in terms of producing various commodities because the effect of growth of productive capital on wages is lower.  In ratio form, the two are denoted as L and K where L stands for labor and K stands for Capital. For a country to be labor abundant, L/K should be lesser than other countries compared to.

What is the capital-abundant country?

Answer: A capital abundant country is a country where capital is available in surplus amounts and this will give a competitive advantage to that particular country to produce capital intensive goods rather than labor intensive goods. In ratio form, the two are denoted as K and L where K stands for capital and L stands for labor. For a country to be capital abundant, K/L should be greater than other countries compared to.

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Could trade help reduce poverty in Brazil and other developing countries?

Answer: Trade is rational and is an essential for development of countries like Brazil and other developing countries to help eliminate poverty, increase employment and even fosters better income distribution. Trade helps each other in an increasing competitive world to grow at rates higher in order match up with the global trading system which countries are part of as it helps with reducing cost, providing employment, match up with products which helps in providing inputs for the industries, obtain the resources such as investments required in order to produce goods . The countries economy also grows more faster and gets stable as well as goods get innovated to match up with the global market.

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