Fig. 1 shows the maximum daily production combinations of boats and medical kits in two economies before they trade. Point A is a possible output combinatio...
Question 1 Report
Fig. 1 shows the maximum daily production combinations of boats and medical kits in two economies before they trade. Point A is a possible output combination for Coastland.
(a) What does a point inside Coastland's production possibility curve, such as A, show? [2]
(b) Explain why a country may specialise according to comparative advantage rather than absolute advantage. [3]
(c) Assess whether international trade will always increase the living standards of workers in both economies. [4]
Answer Details
(a) Point A is inside Coastland’s production possibility curve, so output is below the maximum possible [1]. This means resources are unemployed or used inefficiently [1]. A point on the curve would show full and efficient use of available resources.
(b) Comparative advantage depends on lower opportunity cost [1], not simply producing the largest absolute amount. Each economy can concentrate resources on the good it sacrifices least to produce [1]. Through trade, this can increase total output and the range of goods both economies can consume [1].
(c) Trade can lower prices, increase consumer choice, and raise export employment or income [1]. Specialisation can also raise productivity and economic growth [1]. However, import competition may cause unemployment in declining domestic industries [1]. Therefore trade does not automatically improve every worker’s living standards: the outcome depends on worker mobility, retraining, wages, and how the gains from trade are distributed [1].
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