o Without trade, Brazil produces 75,000 units of clothing and 30,000 cans of soda.
o Denote these points on each other’s production possibility frontier.
• What is the marginal transformation rate for each country?
o Should the two countries specialize and trade?
o If so, who has the comparative advantage in what product?
o 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?
o 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?
This question was asked on Nov 30, 2013.
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