Question

Country A and country B produce the same consumption goods and capital goods and currently have identical production
possibilities curves. They also have the same resources at present, and they have access to the same technology.
a. At present, does either country have a comparative advantage in producing capital goods? Consumption goods?
b. Currently, country A has chosen to produce more consumption goods, compared with country B. Other things being
equal, which country will experience the larger outward shift of its PPC during the next year?

Answer 1

Answer:

a. No b. Country B

Explanation:

a. Two countries A and B have identical production possibility, they have the same level of resources and state of technology. Initially, neither of them will have a comparative advantage in the production of any of the goods.  

b. When country A will chose more consumer goods, it will remain on the same curve. Country B, however, chooses capital goods, it will be able to produce more goods using those capital goods. So, its production possibility curve will shift outwards.