Production Possibilities Curve Is \"A

Production possibilities curve is "a graphical representation of the alternative combinations of goods and services an economy can produce" (Rittenberg & Tregarthen, 2009). When an economy is producing a level that has some inefficiency, it is producing below the production possibilities frontier. Trade barriers represent one form of market distortion from which inefficiency derives. Consider Ricardo for a moment, that under the theory of comparative advantage nations will produce more when they have free trade in the goods and services for which each has a comparative advantage (Landsburg, 2007). When such trade is restricted -- as occurs when there are trade barriers -- an economy will produce below its maximum efficiency. As a result, when these trade barriers are removed, the economy moves closer to its production possibilities frontier.

Removing trade barriers can also cause the production possibilities frontier to shift outward, representing an increase in the economy's potential production. The reason for this is that when an economy has increased access to different resources, the economy can use the resources that it already has in a more productive way. These synergies -- such as when developing world nations removed barriers to capital flows, bringing in foreign direct investment to couple with their labor and natural resources -- allow the nation to produce more with its resources than would otherwise be possible.

2. Rittenberg and Tregarthen (2009) argue that an economy operating inside its production possibilities curve could improve its performance. Such an economy is not fully using the resources available to it, and when it does utilize resources it is not utilizing them on the basis of comparative advantage. Economies that operate inside the production possibilities frontier, therefore, can produce more of all the goods and services that people value, thereby increasing availability of those goods and the national standard of living (Ibid).

3. There are two factors that could cause the production possibilities curve to shift outward, representing an increase in the economy's potential output. The first is through the acquisition or discovery of new resources. So for example when China invaded Tibet, it gained access to the mineral and water resources of that nation. When Britain handed Hong Kong back to China, that move saw China gain access to Hong Kong's knowledge and capital. Both instances saw China's production possibilities frontier pushed outward. Free trade also helps a nation can access to new resources. For example, if an economy can produce more with the help of machinery, then it needs to import oil to run that machinery. By doing so, the productive capacity of the economy will increase. Nations in the West often bring in new labor in the form of immigrants, and this increases the productive capacity on the nation.

The second reason why the production possibilities curve would expand outwards is through the introduction of new technology that improves efficiency. The development of the assembly line was an early example of expanded production owing to innovation. New technology and innovation allows for economies to utilize their resources more efficiently, and this allows for the same resources to result in more production. These two factors -- an increase in the factors of production and an increase in efficiency allow a nation to expand its production possibilities frontier.

4. Among the objectives that underpinned the creation of the European Union was the idea that nations with strong trade ties are unlikely to wage war on one another. Another idea is that the nations on the continent needed to increase their wealth rapidly, to restore their devastated economies. Thus, the European Union has resulted in entirely deregulated trade among its member nations (Rittenberg & Tregarthen, 2009). This allowed the nations within the Union to take better advantage of comparative advantage. An example cited in the case is that Germany makes high-end automobiles while Spain produces low-end automobiles, each to their own comparative advantage. Examples like this occur throughout the EU, whereas at one point many nations within Europe had their own industries for most goods.

The standard of living in Europe has increased over the time that the EU has been around, but that can be said of most nations on Earth. The key to evaluating Europe's progress under the EU experiment is to consider if the standard of living in Europe is higher today than it would have been without the EU. This is actually debatable. Certainly, these nations have avoided war with each other, something that they could not manage to do prior to the EU. In addition, the nations within the EU have by far exceeded the success of the former Communist nations, or nearby nations like Turkey. Yet, one cannot really make the case that the EU nations are vastly ahead of non-EU nations like Switzerland or Norway. Those nations have seen their standards of living rise significantly without participation in the EU. While standards of living have certainly increased among the EU nations, this may be the result of adding new technologies and new factors of production, thereby pushing the production possibilities frontier outward.

5. From an economic perspective, free trade is the best way to optimize an economy. By engaging in free trade, nations can move closer to their production possibilities frontier, and they can extend their production possibilities frontier outward. Removing trade barriers may cause harm to some economic sectors, but will benefit others and the net effect will be positive for the economy, because efficiency will increase, meaning that output will also increase.

The main drawbacks to free trade are non-economic. If trade is so free that there is no role for government, this is probably going to have a negative impact on many within the population. A more realistic scenario holds that free trade would cause a nation to trade in things in which it has a comparative advantage, but those things might not be the most beneficial for the people within an economy. There are examples of this in the developing world where agriculture is repositioned away from food crops to cash crops, to the detriment of society which must then import the food. Comparative advantage does not guarantee that an economy will produce goods that are useful to it; only to the world at large. The EU case had the example of Spain producing low-end cars, but low-end products earn poor margins and for an economy this can mean lower average wages than found in Germany, which produces high-end cars.