Guns And Butter Curve

What is the 'Guns And Butter Curve'

The guns and butter curve is the classic economic example of the production possibility curve, which demonstrates the idea of opportunity cost. In a theoretical economy with only two goods, a choice must be made between how much of each good to produce. As an economy produces more guns (military spending) it must reduce its production of butter (food), and vice versa.

Guns And Butter Curve



BREAKING DOWN 'Guns And Butter Curve'

In the chart, the red curve represents all possible choices of production for the economy. The black dots represent two possible choices of outputs. The point here is that every choice has an opportunity cost; you can get more of something only by giving up something else. Also notice that the curve is the limit to the production - you cannot produce outside the curve unless there is an increase in productivity.



RELATED TERMS
  1. Normal Yield Curve

    A yield curve in which short-term debt instruments have a lower ...
  2. Flat Yield Curve

    A yield curve in which there is little difference between short-term ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, ...
  4. Inverted Yield Curve

    An interest rate environment in which long-term debt instruments ...
  5. Humped Yield Curve

    A relatively rare type of yield curve that results when the interest ...
  6. Positive Butterfly

    A non-parallel yield curve shift in which short- and long-term ...
Related Articles
  1. Professionals

    Yield Curve Risk

    CFA Level 1 - Yield Curve Risk. Learn how yield curve risk can affect your bond portfolio and how the various shifts in the yield curve relate to interest-rate risk.
  2. Professionals

    Yield Curves

    CFA Level 1 - Yield Curves. Learn how governments can influence short and long-term interest rates. Discusses the various shapes of yield curves and how they are formed.
  3. Bonds & Fixed Income

    Yield Curve

    Learn more about how this curve is used to predict changes in economic output and growth.
  4. Economics

    What Is Supply?

    Supply is the amount of goods a producer is willing to produce at a given price, and is one of the most basic concepts in economics.
  5. Professionals

    Marginal and Average Total Cost Curves

    Marginal Cost Curve and the Average Total Cost Curve. Learn the different types of economic cost curves and the law of diminishing returns.
  6. Fundamental Analysis

    The Risks Of Investing In The Gun Industry

    Investing in the gun industry could be an interesting proposition, but it all depends on timing.
  7. Investing

    Trade Bond ETFs Using Yield Curves

    Different types of yield curves provide important insights for trading bond-based securities.
  8. Professionals

    Yield Curve

    Yield Curve
  9. Professionals

    Yield Curves

    FINRA/NASAA Series 65: Section 8 Yield Curves. In this section normal, inverted and flat yield curves and yield spreads.
  10. Fundamental Analysis

    Understanding Term Structure of Interest Rates

    The term structure of interest rates is a common method of valuing bonds.
RELATED FAQS
  1. What does "guns and butter" refer to?

    Guns and butter refers to a famous model explaining the relationship between two goods that are important for a nation's ... Read Answer >>
  2. How can the yield curve help me make investment decisions?

    Learn about the yield curve, and discover why this chart is an important economic indicator. How do Treasury bond yields ... Read Answer >>
  3. Why are the term structure of interest rates indicative of future interest rates?

    Learn why economists believe the term structure for interest rates reflects investor expectations for future interest rates ... Read Answer >>
  4. What does the yield curve actually predict?

    Find out what an inverted yield curve represents, how it has performed as a leading indicator and why it appears to hold ... Read Answer >>
  5. What is the current yield curve and why is it important?

    Understand what the current yield curve represents, and learn how market analysts commonly interpret various changes in the ... Read Answer >>
  6. How does gun control policy affect the stock price of firearm companies?

    In general, companies that manufacture firearms, ammunition, and firearm accessories will find it easier to sell their products ... Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center