Cost of Production


If an unintended increase in business inventories occurs at some level of GDP, then GDP:​

​is too low for equilibrium

​entails a rate of aggregate expenditures in excess of the rate of aggregate production

​is too high for equilibrium

​may be either above or below the equilibrium output


​The fact that international specialization and trade based on comparative advantage can increase world output is demonstrated by the reality that:

​a nation’s production possibilities and trading possibilities lines coincide

​the production possibilities curves of any two nations are identical

​a nation’s trading possibilities line lies to the right of its production possibilities line

​a nation’s production possibilities line lies to the right of its trading possibilities line


In the theory of comparative advantage, a good should be produced in that nation where:​

​its cost is least in terms of alternative goods that might otherwise be produced

​its absolute cost in terms of real resources used is least

​its absolute money cost of production is least

​the production possibilities line lies further to the right than the trading possibilities line

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