3. (a) Explain what can we learn from a country\'s production possibilities curv

Question

3. (a) Explain what can we learn from a country's production possibilities curve? (b) How can a nation production possibilities curve shift inward? (c) Why the production possibilities cure is bowed-out in shape?

4. Will a nation tend to export or import goods for which it has comparative advantage? Explain.

5. How can we measure the opportunity cost of producing a good? Using a bowed outward production possibilities curve between ice cream and hammers, identify graphically the opportunity cost of obtaining an additional hammer.

6. Does economic growth eliminate scarcity? Why

Explanation / Answer

(3)

(a) A country's production possibility curve (PPC) shows the combination of two goods which the country can produce by fully utilizing its existing resources and technology. With the current available resources, a country cannot produce any combination of goods outside the PPC because such a combination is unattainable.

(b) A PPC can shift outward if available resources, factors of production and/or technology endowment increases. If productivity in one of the goods' production increases, the PPC shifts outward only along that good's axis. If the additional resources are utilized in production of both goods, then PPC shifts out along both the axes.

(c) Slope of PPC represents the units of one good to be given up in order to obtain one additional unit of the other good. As more of a good is desired, higher and higher amounts of the other good must be given up to produce that additional unit. This represents an increasing opportunity cost (relative price) of one good in terms of the other. This principle is reflected in the bowed-out shape of the PPC.

(4)

A country will benefit from trade it it exports the good which it can produce at a lower opportunity cost compared to another country, that is, the good in which it has comparative advantage.

NOTE: First 2 questions are answered.

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