1. Shown below are the production possibilities curves for two nations: the Unit
ID: 1187184 • Letter: 1
Question
1. Shown below are the production possibilities curves for two nations: the United States and Chile. Suppose these two nations do not currently engage in international trade or specialization, and suppose that points A and a show the combinations of wheat and copper they now produce and consume.
a. The straightness of the two curves indicates that the cost ratios in the two nations are (changing, constant) _____________.
b. Examination of the two curves reveals that the cost ratio in
(1) the United States is ______ million tons of wheat for ______ thousand pounds of copper.
(2) Chile is ______ million tons of wheat for ______ thousand pounds of copper.
b. If these two nations were to specialize and trade wheat for copper,
(1) The United States would specialize in the production of wheat because _______________________________________________
_______________________________________________.
(2) Chile would specialize in the production of copper because ______________________________________________________
______________________________________________________.
c. The terms of trade, if specialization and trade occur, will be greater than 2 and less than 4 million tons of wheat for 1000 pounds of copper because _______________________________________
_______________________________________.
d. Assume the terms of trade turn out to be 3 million tons of wheat for 1000 pounds of copper. Draw in the trading possibilities curves for the United States and Chile.
e. With these trading possibilities curves, suppose the United States decides to consume
5 million tons of wheat and 1000 pounds of copper while Chile decides to consume 3 million tons of wheat and 1000 pounds of copper. The gains from trade to
(1) the United States are _____ million tons of wheat and ______ thousand pounds of copper.
(2) Chile are _____ million tons of wheat and _____ thousand pounds of copper.
Explanation / Answer
If the United States ended its decades-old embargo of trade with Cuba and we began importing sugar and tropical fruit from Cuba, while exporting wheat and farm equipment to Cuba:
(a) the dollar would depreciate.
(b) Cuban collective farms would become private farm operations.
(c) a serious U.S. wheat shortage would develop quickly.
(d) both the U.S. and Cuban might reduce their spending on national defense.
The trade-offs facing a society can be illustrated in a graph known as the production possibilities curve. The production possibilities curve shows the maximum quantity of goods and services that can be produced using limited resources to the fullest extent possible. To get a graphical representation of how an economy makes decisions on what to produce, or spend their money on, a Production Possibilities Curve is used. Production Possibilities Curve shows the choices a country can make with respect to its available resources. These resources are land, labor, and capital and entrepreneurship. A production possibilities curve shows that more of one type of a good, or both capital goods and consumer goods, can be produced only by reducing the quantity of other types of goods that are produced. Only one combination of goods and services can be produced at one time.
The points inside the production possibilities curve indicate that resources are not being fully or efficiently used, while points outside a PPC shows an impossible combination implying that there are insufficient resources to produce quantities lying beyond the curve. More resources would have to be obtained, or a more efficient means of production through the development of technology or innovative management techniques would have to be discovered to produce quantities of goods and services outside the current production possibilities curve.
There will be a shift in the Production Possibility Curve when the society is able to produce more output if technology is improved, more resources are discovered, economic institutions get better at fulfilling wants, and economic growth. The PPC moves outward (growth occurs) as the result of Increased resources, larger labor force, change in labor force participation, change in labor-leisure decision, Improved technology (innovation), expansion of capital stock, an improvement in the rules (laws, institutions, and policies) of the economy. The production possibilities curve, however, focuses on productive efficiency and ignores distribution.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.