Question

Assume that, compared with other nations, the country of New Bispo has a higher opportunity cost in the production of automobiles and a lower opportunity cost in the production of televisions. Determine whether the statements below are true or false.
a. Without trade, if the people of New Bispo want automobiles and televisions, New Bispo will produce its own automobiles and televisions.
b. With specialization and trade, New Bispo can obtain one or more automobiles from another nation by trading some of its televisions for automobiles.
c. New Bispo should specialize in producing the items in which it has a higher opportunity cost compared to other nations.
d. Without trade, the opportunity cost for New Bispo of producing more automobiles is fewer televisions.
e. With specialization and trade, the combinations of automobiles and televisions that New Bispo can consume are limited to points below the production possibility frontier.

Answer 1

Solution :

Statement a is TRUE.

-- As without trade, a country will consume what the country produces in its country. So the country, New Bispo will have to produce their own television and automobiles as they are operating under autarky.

Statement b is TRUE.

-- The country New Bispo has a comparative advantage than the other countries in production of television. Specialization as well as trade makes the country to exchange its best products(television) for some other goods(i.e. automobiles) and benefited from it.

Statement c is FALSE.

-- The statement is false as the when a country produces more of products in which it specializes and also has a lower opportunity cost, it provides for the maximum benefit. So by using specialization, the country can concentrate on production of a single item at a time that it can do its best.

Statement d is TRUE.

-- The opportunity cost for the production of automobiles is high for New Bispo, therefore, it indicates that a country will produce more of automobiles but it has to lower down its television production.

Statement e is FALSE.

-- The statement is false as the points that lies outside the curve can be attained with the resources and technology that are already existing if the trade occurs with the outside producer. The trade makes it enable to consume outside the production possibility frontier. So with trade and specialization, New Bispo are able to consume automobiles as well as television as they can operate beyond the PPC frontier.