Question

Trade makes sense when a country can produce a good at a lower opportunity cost than another country. Explain why this is the case.

A consumption possibilities curve (CPC) is separated from the PPC when trade is present. Explain what the CPC represents and how it shows increased well being in society with trade.

Answer 1

Trade makes sense when a country can produce a good at a lower opportunity cost than another country. Explain why this is the case. Trade is beneficial only when it is based on the concept of comparative advantage. That is, if a country is able to produce a goods at a lower opportunity cost as compared to its competitor, then it means the country has comparative advantage in production of that good. In such a case, the country must specialize in the production of that particular good only and then export it in the world trade market and exchange it for the other good in which the competitor country has comparative advantage. This helps both the trading partners increase their consumption and thus welfare. A consumption possibilities curve (CPC) is separated from the PPC when trade is present. Explain what the CPC represents and how it shows increased well-being in society with trade. A CPC represents all points showing different combinations of goods that an individual or producer can obtain. A PPC represents all points showing different combinations of goods that an individual or producer can produce. In the presence of trade based on comparative advantage, the trading partners are able to consume even those combinations of goods which it earlier could not produce. This means post trade, the CPC shifts out of the PPC, thereby benefitting the trading partners.