1. Why does a production possibilities curve bow out rather than forming a straight line sloping downward from left to right?
2. Out of all of the possible production points along a production possibilities curve, which one of those points does a nation select and why?
3. What does the Heckscher-Ohlin Theory say about what determines the trade patterns between countries?© BrainMass Inc. brainmass.com December 24, 2021, 11:57 pm ad1c9bdddf
SOLUTION This solution is FREE courtesy of BrainMass!
1) A production possibilities curve bows out rather than forming a straight line sloping downward from left to right because decreasing returns to scale. Assume there are just two goods for a country and think of the extreme example where they devote themselves to producing just one of the two goods. In order to get the last few units produced, they would have to tap every available capital and labor resource. The more they produce, the more inefficient they become at producing that good. Now if they switched to just producing the other good the same would happen. Each additional parcel of land would likely get more and more expensive to convert to wheat fields for instance as land gets scarcer. Now think of a more neutral mix such as 50% wheat and 50% cars. This would have greater efficiencies since the country likely has certain efficiencies in each industry. They have certain land best suited for farming and other areas best suited for manufacturing for example. So due to decreasing returns to scale the curve bows outward instead of being a straight line.
2) Out of all the possible points on the production possibilities curve, a nation will choose the one that offers the greatest utility to its population. However, it isn't just as simple at looking at the product mix that the consumers can purchase only through domestic production. In the worldwide economy, the nation can trade goods with other nations that can produce them relatively more efficiently than the nation can produce them domestically. In other words, the point on the production possibilities curve must take into consideration that if a country produces certain goods very efficiently relative to other goods it can produce domestically, than it will favor produce more of that good since it can simply overproduce relative to domestic demand and then trade that good for other goods that consumers would prefer. In this way a nation can maximize the utility of its domestic consumers. A simple example of this is assume there is a third-world country with a disproportionate amount of cheap labor and very little capital. Even though this country may have a high demand for capital intensive goods, it would be better off producing extra labor intensive goods such as food from farming, and then trading for those capital intensive goods from a country that has technology and capital and expensive labor. Both countries would benefit in this case.
3) The Heckscher-Ohlin Theory is similar to the comparative advantage model in that it says that production will shift toward the factors that are most efficient within a country. It predicts that a country will tend to import products that are difficult to produce domestically because they rely on scarce factors and will overproduce those goods that are based on their abundant and inexpensive factors. Assume there are two countries within a trading area. Country A is capital intensive, has expensive labor costs but cheap capital due to it's technology, while Country B is labor intensive and capital scarce. In this instance, the Heckscher-Ohlin Theory would predict that Country A would produce capital intensive goods while Country B will produce labor intensive goods. So for example, Country A might produce televisions, cars and microwaves, while Country B produces wheat and produce. Then the two countries would trade their specific goods with the other country. In this way, Both Country A and Country B would end up better off than if they each tried to produce half-and-half.© BrainMass Inc. brainmass.com December 24, 2021, 11:57 pm ad1c9bdddf>