Comparative_Advantage

Comparative Advantage-Brazil Penny Breslin ECONGM-561 Due: September 1, 2010 Dr. George K. Sharghi Comparative advantage determines whether it pays to produce a good or import it. Using the Ricardian model as defined in the text (Gerber, 2008) for this class I compare the comparative advantage of Brazil in the United States on the production of cars versus computers. In this description we have two countries and two goods. The assumed productive resources are combined and include land, labor and capital. The US can produce 100 cars for every two (2) productive resources. Brazil, on the other hand requires four (4) production resources for every 100 cars produced. In the area of computers the US requires three (3) production resources for every 1000 computers created and Brazil requires four (4). Although the US has an absolute advantage over Brazil in both of these goods in truth it costs more to produce the computers in the US as compared to the costs in Brazil. If sees this as an opportunity cost for every 100 cars the US produces it loses the production of 666 computers. Brazil has an opportunity cost of 1000 computers for every 100 cars produced. In this scenario Brazil is better if it produces computers and the US is better if it produces cars. In an import export scenario Brazil comparative advantage is to produce computers and sell them to the US whereas the US produces cars and sells them to Brazil. The trade between the two countries if they hold with these products should remain healthy. Although a producer of Airplanes, mobile phones and Swine products for several decades it was not until the 1999 when Brazil adopted a competitive exchange rate, did the growth in exports begin a steady climb. Previously Brazil experience fluctuations on export growth (Bonelli & Pinheiro, 2008). In their research Bonelli and Pinheiro looked at the export changes in Brazil and attempted to determine what were the best goods for Brazil to export, comparative advantage, and provides for the growth of these exports that increased by a factor of 13.7 during three (3) decades of exports (Bonelli & Pinheiro, 2008). The researched concluded that Brazils diversity of exports along with currency exchange rate adaptations and strong pull by increase world trade during the first half of this decade, enabled Brazil to increase exports and specifically in three (3) goods. In the period of 1999 to 2004 after Brazil devaluated its exchange rate the increase in demands from other nations contributed an increase of 51 to Brazil’s exports (Bonelli & Pinheiro, 2008, p. 25). Although Brazil has many natural resources and an excellent market for commodities production the three areas that grew the most were for exports were Airplanes (both full production and parts), mobile phones and the commodity or swine meat. Low wages and high demand is attributed to the growth. Brazil’s ability to diversify its imports along with the demand was seen as most influenctial in this fast growth (Bonelli & Pinheiro, 2008). Swine meats were already produced for the local market so factors of costs were a known to Brazil in this area. The added costs in this area came from the sanitation requirements of the importing countries (Bonelli & Pinheiro, 2008, p. 29). Even with the needed addition of costs to satisfy the guaranteed sanitation requirements of importers, this commodity export may increase even in a slower economy. In 2005 one company in Brazil that owned a swine production organization reached record exports to the US of US$1.7 billion (Bonelli & Pinheiro, 2008, p. 94). (Last week CNN announced there was a pork shortage in the US. Brazil are you listening') Although a developer of planes for years under government control, not until the Embraer airplane manufacturer became a private entity did this good see an increase in exports. In this case the removal of government control and cost modifications was helpful. The Embraer 120 and 135 filed out the fleets of US commuter airlines like United Express and Skywest Delta during 2000 to 2004. Brazil had a wells established reputation for technology mastery of aeronautics. Contracts from companies like Bombardier and Rolls Royce attest to the quality. With the devalued currency and the appreciation of the euro at the same time law wages and solid technology gives Brazil a comparative advantage in airplane development, manufacturing and parts production (Bonelli & Pinheiro, 2008, p. 47). Mobile Phone technologies are most often developed in high technology countries with the low cost production of the parts in places like Brazil with its large population, strong education and low cost of labor it the comparative advantage. Even exports to other high exported like China and India increased during this period (Bonelli & Pinheiro, 2008). Mobile Phone production was originally developed by outsourcing nations that established plants within Brazil during 1996-99. In 2000 the Brazilian government instituted public incentives for locally owned telecom companies. Exports of Brazilian cell phones and parts jumped to US$ 0.7 billion and continued to climb to over US1 billion by 2003 (Bonelli & Pinheiro, 2008, p. 61) Of note and one that points out comparative advantage is that in 2004 exports in cell phones dropped while internal demand for cell phones increased. Brazil was expanding its middle class and demand for home products sold internally exceeded the export demand. Once the demand for exported cell phones increased on 2006 the comparative advantage soon had Brazil increasing exports of cell phones (Bonelli & Pinheiro, 2008). In these three products we can find similarities. First all three had strong domestic development. Even with Cell phones the first outsources focused sales on the domestic markets in Brazil. Swine and aircraft production has been ongoing and had a strong domestic growth before exports. Government intervention helped buy first owning the Embraer, then incentivizing domestic development of telecoms and assisting sanitation rules with swine product production. Growth in all three products showed that Brazil was becoming diversified and specialized in it exports. They were no longer just exporters of natural resources such as coffee, oil, ores and agriculture. Exports grew because of global world trade growth. In other words Brazil was pulled into the export economy. Brazil’s government has shown interesting understanding of the global market: Devaluation of currency to increase demand for exports, incentives for domestic development and ownership of telecoms, once the foreign investments had proof of concept, and the release of the aeronautics industry to private ownership, all show healthy understand of trade and comparative advantage. REFERENCES Bonelli, R., & Pinheiro, C. A. (2008). New Export Activies in Brazil: Comparative Advantage, Policy or Self Discovery' Washington DC: Inter-American Development Bank. Gerber, J. (2008). International Economics (4 ed.). Boston, MA, USA: Pearson Education, Inc.