Question

suppse that brazil is a capital abundant country and praguay is labour abundant country, describe the potential migration of the factors of the migration between the two countries. explainthe potential effects on the returns to capital and labour in each country

Answer 1

Brazil being a country with capital in abundant amount will produce capital intensive goods, so attract migration of those workers who are skilled and can work in capital intensive industry. Here, the migration of these workers will be from Paraguay to Brazil. Though, Paraguay, being a labor intensive country, will produce labor intensive goods, so attracting migration of workers from Brazil to Paraguay who are less skilled and adapted to work in labor intensve industry.

The potential effect will be that Brazil will develop comparative advantage in capital intensive goods and Paraguay will develop comparative advantage in labor intensive goods. Afterwards, they can trade with each other and consume goods outside of the their PPF curve of before trade.