Question

What is meant by the consumption possibilities of a country? question How are Consumption possibilities related to production possibility in a closed economy? In an open economy?

Answer 1

Consumption possibility of a country refers to the possible combination of goods that the people in the nation can feasibly consume. Feasably consume means consumption is within the budget (income/output) of the nation.

Production possibility is the amount of goods that a nation can produce based on its finite resources. In a closed economy there is no option to trade and the nation can only consume what it can produce within its geographical boundaries with its limited resources. In other words consumption possibility for a closed economy equals the nations domestic production possibility.

In an open economy there is the option that the nation exports and imports (in other words nations can exchange goods with each other). Generally a nation will export good it has relative advantage in producing and import that good in which it has relative disadvantage in producing. This allows for the nation to avail itself more income (by exports) and more combination of possible goods (by imports). Thus in an open economy, consumption possibilities are usually greater than, and are never less than, the economy’s production possibilities. Trade increases both production and consumption possibility of the nation.