Trade and Production Possibilities

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How trade affects the production possibilities frontier

Trade contributes very positively to the production possibilities frontier because it leads to greater production of commodities or services. This is largely because trade would allow resource allocation depending on comparative advantage thus leading to efficient production. Trade offers countries the possibilities of choosing locations or resources that work best for them. In other words, it may not necessarily be that a certain firm or country is good at producing a certain commodity so it must be designated with that role, but it may be that the latter country is less efficient in production of an alternative good or service thus implying that it would be more efficient to focus on the first good than the second one.

Trade therefore makes it possible for parties to switch between various productions as they have the flexibility to select what would be the most appropriate type of commodity to serve them. In other words trade restrictions often cause countries to stick to certain goods and services even when another country is better at producing it. It should be noted that the latter explanation does not just apply to countries in general as it is also applicable to specific companies. (TUI, 2009)

Other factors that can expand the production possibilities frontier

Employment of all factors of production can lead to an expansion of the production possibilities’ frontier. This is because it allows companies to use all resources available to them to make their goods and services and this substantially increases output. Companies or countries must therefore make sure that they fully employ the factors of production in order to increase their production possibilities frontier. For instance, if all the labor in a country is fully exploited i.e. if all workers are in employment, then chances are that the economy will record greater numbers of the service or good that they produce and this substantially influences their production possibilities frontier.

Aside from the latter, efficient production can also increase the production possibilities frontier. Efficient production is only possible when companies choose to allocate resources to the firm or the production facility with the greatest comparative advantage. Taking an example of 3 firms (a, b & c) that produce 3 types of shoes in different ways but all the firms can produce the three types of shoes. The most effective way of expanding the production possibilities frontier would be to make sure that all firms use only the quantities that give them a comparative advantage. This brings in the concept of specialization. Not all companies can produce the same types of goods in the same way as others. Companies or countries must select what they are good at and then focus on it. Trying to do everything at the same time would be tantamount to a very low production possibilities frontier but the reverse is true.

Argument for trade

Some groups believe that almost all rich countries grew to the top as a result of infant industry protection and that trying to impose free trade upon developing or underdeveloped nations is tantamount to double speak. (Chang, 2007) In this regard, the latter proponents believe that trade causes more harm than good. However, this argument along with many others is based on miscalculations and false premises.

One of the greatest economists in the world Adam Smith asserted that it is illogical for families to make things at home which they can acquire from outside at a lower price, consequently, countries are at a better position if they purchase what they did not produce very well and then focused on the commodities that they are most efficient at doing. Despite this obvious advantage, most countries keep opposing trade or free trade for that matter because of unfounded reasons. Opponents fear that Americans will loose jobs to foreign substitutes. However, this is a false premise since nations’ wage levels depend on their productivity rather than their policies.

The US can continue to reap benefits of huge wages by continuing to use superior technology, educating its workforce and employing more capital. Also, other proponents tend to argue that the country needs to protect its infant industry. Once again, this a big misconception assumed to actually be helping certain industries but the truth of the matter remains that most of the tariffs never get reversed and the consumer is left to bear the brunt. Free trade would therefore be a more effective environment to operate in. (Blinder, n.d.)

What the government should do to support this argument

The government can achieve this by first promoting imports and trying to fight the notion that the latter are an evil to the American society. There are several examples that demonstrate this principle such as the German automobiles that citizens drive or Chinese toys that parents love to buy. Politicians should start endorsing benefits of free trade.

It would also be favorable for the country if the government reduced tariffs on imports. This is because it would allow the country to bring in commodities or services that are equivalent to the value of goods that the country also sends to the rest of the world. In line with the latter action, the government should also refrain from interfering with currency negotiations as the free market has a way of working out the most appropriate rates. This is because the value of the dollar is a reflection of production and the country’s economy and this would effectively mitigate changes in labor gaps between trade partners. Government central banks often interfere with prices of their currencies and this causes tremendous monetary losses. (Friedman, 1997)


Blinder, A. (n.d.). Free Trade. Library of Economics and Liberty. Web.

Chang, H (2007). Protecting the Global Poor. Prospect Magazine. Web.

Friedman, M. (1997). The Case for Free Trade. Hoover Digest.

TUI (2009). Supply and production. TUI Publication.

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