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Question 7
The diagram below shows Government Finance Statistics for 2019. Government Balance Government Surplus €1.3bn (0.4% of GDP) Gross Debt per Person 2007 €11,138 2013... show full transcript
Step 1
Answer
When the government allocates funds to service the national debt, it utilizes limited financial resources that could be otherwise deployed for alternative investments. This means that those funds are not available for other governmental duties or public services, such as education or infrastructure.
For instance, if a portion of the national budget is directed towards interest payments on the debt, it decreases the budget available for essential services like healthcare, which could improve public welfare. The opportunity cost here reflects the potential benefits lost from investing in these alternative areas due to the prioritization of debt repayment.
Step 2
Answer
Had these resources not been allocated to debt servicing, they might have been utilized for projects aimed at enhancing economic growth or social welfare. For example, investing in the health sector could potentially result in a healthier workforce, increased productivity, and consequently foster long-term economic stability. Therefore, the choice to service national debt carries an inherent trade-off, illustrating the concept of opportunity cost.
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