What happens to the production possibility curve when people

What happens to the production possibility curve when people specialize and trade? Why do specialization and trade make individuals better off?

Solution

Ans:

The specialise and trade will make individuals better off. Because this is based on the Principle of Comparative Advantage. Absolute advantage compares the quantity of inputs required to produce a good. The producer that requires fewer resources to produce a good is said to have an absolute advantage in the production of that good. That is, the most efficient producer has an absolute advantage. While absolute advantage compares the actual cost of production for each producer, comparative advantage compares opportunity costs of production for each producer. The producer with the lower opportunity cost of production is said to have a comparative advantage. If producers have different opportunity costs of production for each good, each should specialize in the production of the good for which their opportunity cost of production is lower. That is, each producer should produce the item for which they have a comparative advantage. They can then trade some of their output for the other good. Trade makes both producers better off because trade allows for specialization, and specialization increases the total production available to be shared. Trad allows producers to exploit the differences in their opportunity costs of production. Each specializes in the production of the good for which they have the lower opportunity cost of production and, thus, a comparative advantage. This increases total production and everyone can benefit through the additional production generated by specialization is the gain from trade.