Suppose the world economy is composed of just two countries: Italy and Greece. Each can produce steel or chemicals, but at different levels of economic efficiency. The production possibilities curves for the two countries are shown in the graphs below. Refer to the graphs and information above. It can be deduced that:

Question

Suppose the world economy is composed of just two countries: Italy and Greece. Each can produce steel or chemicals, but at different levels of economic efficiency. The production possibilities curves for the two countries are shown in the graphs below.  Refer to the graphs and information above. It can be deduced that:

Quizplus · Accepted Answer

Comparative advantage refers to the ability to produce goods or services at a lower opportunity cost than another producer. From the graphs, we can see that  Greece has a lower opportunity cost of producing chemicals than Italy (it must give up less steel production to produce the same amount of chemicals). Therefore, Greece has a comparative advantage in producing chemicals. The other options are not necessarily true, as having the absolute advantage in a product does not guarantee comparative advantage, and the costliness of production cannot be determined solely based on the graphs.

Suppose the World Economy Is Composed of Just Two Countries