Explain how it is possible for a country to consume a greater quantity of goods and services than it is actually capable of producing.

Question

What will be an ideal response?

Answer 1

It is possible for a country to consume more than it is actually capable of producing when countries engage in specialization and trade. When countries specialize in what they produce most efficiently (i.e., at lower opportunity costs), total world production is increased. We are essentially squeezing more goods and services out of the world's scarce resources. Trade then reallocates these goods and services based on the terms of trade. Trading countries will have more goods and services available for consumption than they can produce individually.