Production possibility frontier

The production possibility frontier indicates the maximum possible output combinations of two goods or services a country’s economy can achieve when all resources are fully and efficiently employed. Production possibility frontier is used to illustrate the concepts of opportunity cost, trade-offs and also shows the effects of economic growth. The production possibility frontier indicates the point at which a country’s economy is most efficiently producing goods and services and, therefore, allocating the country’s resources in the best way possible. For example, Brazil has a production frontier of producing only 100,000 units of clothing per year and 50,000 cans of soda per year. United States has a production frontier of producing 65,000 units of clothing per year and 250,000 cans of soda per year. If a country’s economy is not in a position to produce the quantities indicated by the production possibility frontier, therefore, it means that the resources are inefficiently managed and the production of the society will be diminished. Therefore, the production possibility frontier indicates there are limits to production. The PPF shows the trade-off between outputs of different goods at a given time, but the trade-off can change over time (Mankiw, 2015).

ORDER A CUSTOM-WRITTEN PAPER

Can’t Find the Right Words? We’ll Help You Write a Winning Essay.

Tell us about your paper and we will find the best writer for your essay.

Write My Essay For Me

Which product should each country specialize in, and why?

The production possibilities frontier indicates one of the trade-offs that a country faces. Once a country has reached an efficient point on the frontier, the only way of ensuring that more of the one good among the two goods is produced is producing less of the other good. Therefore, the production possibility frontier indicates that the opportunity cost of one good as measured in terms of the other good. Therefore, United States should specialize in producing of soda as it can consume more of the product without trade as it can produce 125,000 cans of soda per year. Brazil should specialize in the production of clothes because that is what it can produce and consume more without trade as it can produce 50,000 units of clothes per year.

Labor intensive good

Labor-intensive good refers to the goods that require a process that needs a large amount of labor to produce. The degree of labor intensity is measured in proportion to the amount of capital required to produce a good. Therefore, the higher the proportion of labor costs required, the more labor-intensive is the good. The cost of labor is considered as a variable while the capital costs are considered fixed. Therefore, labor-intensive goods have an advantage in controlling expenses during market downturns through controlling the size of the labor force required to produce the good. The labor-abundant country has a comparative advantage in the production of labor-intensive goods because an increase in labor supply or increase in productivity leads to an increase in the production of labor-intensive goods. Specialization in production and movement of goods between countries, in line with their comparative advantage are substitutes for the movement of factors of production and trade. Therefore, this narrows the differences between factor prices. The higher the rate of growth of a country’s labor force, the larger the proportion of labor-intensive goods in production and the larger the comparative advantage of the country in the production of the labor-intensive goods. In the case, Brazil and United States can decide to specialize in the production of labor-intensive good between the cans of soda and the clothes. Therefore, if a country imports a labor-intensive good in a country in which it is produced owing to the relative low wages in the exporting country (Bigman, 2002).

Marginal rate of transformation impact

The marginal rate of transformation refers to the rate at which a given good must be sacrificed so as to produce an extra unit of another good, assuming that all goods require the same scarce inputs. However, the marginal rate of transformation is tied to the production possibilities frontier, which displays the potential output displayed by two goods using similar resources. If one of the goods’ productions is high, it means that the other good will be produced less because the resources are efficiently allocated. Therefore, the marginal rate of transformation is the absolute value of the slope of the production possibilities frontier. The marginal rate of transformation allows countries to analyze the opportunity cost to produce one extra unit of something. For example, United States can produce only 32,500 units of clothing and 125,000 cans of soda; this means the country can only produce those units of each good in accordance with the available resources. However, if one of the good is increased in the number of units produced, then the other product will be decreased because the resources allocated for the production of the two goods is constant (Brunette, 2013).

Labor-abundant country

A country is said to be a labor-abundant country if the endowment of labor is large compared to other countries. Relative labor abundant can be defined either by the quality definition or the price definition. The number of workers in a country defines the labor inputs to the production of goods, and this determines the units of goods produced. In the labor abundant countries, the wages relative to capital is lower, and the countries have an advantage in producing different commodities. The advantage happens because of the different factor endowments of countries and the different mixtures of these factors involved in the production of different commodities. Therefore, without trade between Brazil and United States of America, the countries would reduce the number of units that they produce in accordance with the availability of labor in respective countries. The two countries will adjust the number of units of goods they produce because the trade-off between countries that are labor-abundant will sell goods at a lower price which would compromise the production of the good in the other country. Labor abundant countries can utilize their comparative advantage to develop labor-intensive industries to produce goods (The World Bank, 2015).

Capital-abundant country

A capital-abundant country will export more goods that use the country’s abundant factors intensively and import goods that use the scarce factors intensively. Abundance in capital will cause the capital-abundant country to produce the capital-intensive good cheaper than the labor-abundant. Without trade, the relative price of the capital intensive good is lower in the capital-abundant country because it is produced more relatively more efficiently. Through trade, the relative price of the labor intensive good increases in the labor abundant country. A country is capital-abundant if the price of the capital relative to the price if the country’s labor is lower than the other country. Therefore, the trade between United States and Brazil will be beneficial to the country with abundant capital (Columbus, 2007).

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

Trade can help reduce poverty in Brazil and developing countries because achieving sustainable, and inclusive growth depends on a well-functioning market. A labor-abundant developing country utilizes the comparative advantage to develop highly labor-intensive industries to produce goods. It can also exploit the advantage of backwardness to reduce the cost of innovation. Trade enhances competitiveness through helping developing countries reduce the cost of inputs, acquire finance through investment and increase the given value added to the country’s products and move up the global value chain.