(Growth and the PPF) Use the production possibilities frontier (PPF) to demonstrate economic growth.
a. With consumption goods on one axis and capital goods on the other, show how the combination of goods selected this period effects the PPF in the next period.
b. Extend this comparison by choosing a different point on the period’s PPF and determining whether that combination leads to more or less over the next period.
a. To demonstrate economic growth using the production possibilities frontier (PPF), we need to understand the relationship between consumption goods and capital goods. The PPF shows the maximum quantity of goods that an economy can produce given its resources and technology.
Start by drawing a PPF graph with consumption goods on the vertical axis and capital goods on the horizontal axis. The PPF curve itself represents the maximum combination of consumption goods and capital goods that can be produced given the available resources and technology.
Now, let's assume that in the current period, the economy is operating at a point on the PPF curve. This means it is efficiently utilizing all available resources.
Next, let's consider how the combination of goods selected in this period affects the PPF in the next period. Economic growth occurs when there is an increase in the quantity and quality of resources, as well as technological advancements.
If the economy invests more resources in producing capital goods in the current period, it is sacrificing the production of consumption goods. This shift in resources toward capital goods will result in a new point on the PPF curve in the next period that lies further away from the origin on the capital goods axis. This indicates that the economy has increased its capacity to produce capital goods, implying future growth potential.
b. To extend this comparison, choose a different point on the current period's PPF and analyze whether that combination of goods leads to more or less economic growth in the next period.
If the chosen point lies inside the PPF curve, it represents an inefficient use of resources. This means that the economy can produce more of both goods without sacrificing the production of either. In this case, selecting a point outside the PPF curve would result in more economic growth in the next period.
On the other hand, if the chosen point lies on the PPF curve, it represents an efficient use of resources. Any change in the combination of goods at this point will result in a trade-off, where producing more of one good will require sacrificing the production of the other. To determine whether it leads to more or less growth in the next period, consider the opportunity cost. If the opportunity cost of producing additional capital goods is less than the benefits gained from increased investment, it would lead to more economic growth in the next period. Conversely, if the opportunity cost outweighs the benefits, it would lead to less economic growth.