Question

Why is a country able to consume outside its production possibilities frontier when it engages in international trade?

Answer 1

Production possibility frontier shows the combinations of goods which a country can produce with the given amount of resources and technological level. When a country does not participate in trade, it cannot consume more than what it can produce. However, when a country participates in trade, it can consume more than it can produce. Trade helps a country specialize in a product and produce it at a lower cost. When countries trade, the cost of production goes down and the countries participating in trade can consume a higher level of goods and services as compared to a non-trade situation. Therefore, by participating in trade, a country can consume outside its production possibility frontier.