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.
•What would be the production possibility frontiers for Brazil and the United States?
◦Without trade, the United States produces 45,000 units of clothing and 150,000 cans of soda.
◦Without trade, Brazil produces 75,000 units of clothing and 30,000 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?
•What are the terms of trade if the United States trades 1 can of soda for 5 units of clothing?
◦Are the consumers in each country better off?
•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?
•How do product and factor prices and wages eventually equalize between the two countries?