Suppose there are two countries, Freedonia and Sylvania, which have identical am

Question

Suppose there are two countries, Freedonia and Sylvania, which have identical amounts of resources, identical technologies, and identical populations. Both produce two types of goods, consumer goods and capital goods, and they both always operate on their production possibilities frontiers. The only difference is that this year Freedonia chooses to produce relatively more consumer goods than Sylvania. As a result,

a. Freedonia will have a higher living standard this year but will grow slower than Sylvania.

b. Freedonia will have a higher living standard this year and will grow faster than Sylvania.

c. Sylvania will have a higher living standard this year but will grow slower than Freedonia.

d. Sylvania will have a higher living standard this year and will grow faster than Freedonia.

Explanation / Answer

Consumer goods are only available for present use and will not produce wealth. Capital goods, though not providing an immediate benefit, will produce wealth for future use. when a country produces more capital goods standards of living are reduced in the shorter run because the resources are diverted away from private consumption.However, in the longer run the increased investment in capital goods enables more output of consumer goods to be produced. This means that standards of living can increase by more than they would have if the economy had not made the short-term sacrifice.

now coming to the question, as freedonia chooses to produce more consumer goods it will have a higer standard of living this year but will grow slower tham sylvania in the long run

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