Within the economic environment, the production possibility frontier theory reveals that companies and countries are limited to a specific volume of production especially with the type of technology available to them (Becerra, 2009, p.12). Huff et al. (2009, p.81) revealed that countries usually have a limited number of products that they can produce within their manufacturing facilities due to raw materials, labor, and manufacturing overhead constraints (Huff et al., 2009, p.81). Therefore the maximization of the production possibility frontier of each country or firm is primarily based on the available resources as well as its production experience (Becerra, 2009, p.57).
Based on the limitations of the case there are two products that can be produced by both the US and Brazil, which are soda and clothing. At its most optimal production volume Brazil is seen to have the higher production output of clothing at 100,000 when compared to the 65,000 for the US. With regards to the soda production the US produces a significant number at 250,000 cans when compared to only 50,000 cans for Brazil.
Brazil
The main assumption in the development of the Brazil PPF is that it needs to sacrifice the soda production by 10,000 in order to produce an additional 20,000 of clothing. The optimal volume for the simultaneous production of the two products are at 50,000 soda cans and 100,000 units of clothing. Under the additional assumption that all other costs will remain constant, the Brazil PPF is seen in figure 1 below. Figure 1 revealed that the production of one product will be maximized when the production of another is at zero, which can be graphically represented under the marginal rate of transformation (Policonomics, 2012). At a zero soda production Brazil can produce a maximum of 200,000 units of clothing while a maximum of 100,000 soda cans can be produced at a zero production units for clothing.
Figure 1. PPF graph for Brazil
Based on the PPF graph the production of soda cans is lower by 100,000 when compared to clothing production. This implies that soda production is considered to be more labor intensive than clothing production, which may be due to a limited access to advanced technology required for its manufacturing. The PPF further revealed that Brazil is the more labor-intensive country since it can produce a higher volume for clothing due to the nature of its production process. However a potential problem revealed is that the country’s constituents can only consume 50,000 clothing units and 25,000 soda cans as seen in the blue dot in figure 1. The blue dot graphically represented in figure 1 is under the MRT slope and therefore Brazil is implied to be inefficient with its use of the country resources. This further implies that Brazil is producing more than what it needs to consume and therefore will need to sell its excess production to other countries through trade agreements.
United States
The main assumption in the development of the PPF for the United States is that it needs to sacrifice the clothing production by 13,000 units in order to produce an additional 50,000 cans of soda. The optimal production volume for the simultaneous production of the soda cans is at 250,000 while it is 65,000 units for clothing. The United States PPF as seen in figure 2 revealed that at zero clothing production volume the country can produce 500,000 cans of soda. The maximum number of clothing that can be produced at a zero soda production is at 130,000 units. When considering the two production extremes under the PPF graph, the country is perceived to be more cost-effective when it produces the soda cans.
Figure 2. PPF graph for the United States
This means that the United States is able to produce 3.84 cans of soda when it sacrificed the production of one unit of clothing. This production percentage revealed that the United States can be perceived as a more capital-abundant country than a labor-abundant country. The reason for this is that clothing production is seen to be a more labor-intensive manufacturing process despite the continuing advancements in technology (International, 2016). This was concurred by the maximum production volumes used in figure 2 where it revealed that soda production is higher by 370,000 units when compared to the clothing production. This further implies that the United States has better access to advanced technologies in soda production since economically successful countries are able to purchase and easily adapt to changing technology (Sueyoshi and Yuan, 2016, p.270).
However when the United States is primarily dependent on the consumption of its own production then it can only sell 32,500 clothing units and 125,000 cans of soda to its own constituents. It reveals that when these figures are compared against the optimal production volume the United States is also producing 100% more than what it consumes. This value as the blue dot is under the MRT slope and is revealed to be an inefficient use of the country resources. Therefore the United States will need to sell some of its excess production to other countries in order to remain sustainable.
Country Production Recommendation
Based on the PFF graphs from each country, the best product manufactured by Brazil is clothing while it is soda production for the United States. The reason is that soda production can be maximized by the United States since it has the capital to purchase new technologies while clothing production does not require a high capital investment from Brazil. The main problem is that the clothing industry is primarily afflicted with low predictability, high volatility and low profit margins (International, 2016). The competition in this industry is perceived to be significant high (Industrial, 2016), which means that despite a high production volume the profit generated is low. Production is primarily concentrated on developing countries and therefore can enhance poverty levels. This problem can be alleviated by the suggestion of the international labour organization such as minimum wage agreements, skill development, promoting social dialogues, workplace safety compliance, and adoption of international labour standards.
References
Becerra, M. (2009). Theory of the firm for strategic management: Economic value analysis. New York: Cambridge University Press.
Huff, A. S., Floyd, S. W., Sherman, H. D. and & Terjesen, S. (2009). Strategic management: Logic and action. United States: John Wiley & Sons, Inc.
International Labour Organization. (2016). Textiles, clothing, leather and footwear sector. International Labour Organization. Retrieved from http://www.ilo.org/global/industries-and-sectors/textiles-clothing-leather-footwear/lang--en/index.htm
Policonomics. (2012). Marginal rate of transformation. Policonomics. Retrieved from http://www.policonomics.com/marginal-rate-of-transformation/
Sueyoshi, T. and Yuan, Y. (2016). Marginal rate of transformation and rate of substitution measures by DEA environmental assessment: Comparison among European and North American nations. Energy Economics, 56, 270-287.
