Tuesday, February 21, 2012

How might a production possibility curve be used in assessing a country's economic problems?

A production possibilities curve or production possibility
frontier can be used to determine whether a country is producing to its full potential. 
So it could tell you whether a country has economic problems.  However, the PPC is
really not well suited for this because it is more of a theoretical tool that is used to
teach about opportunity costs and such.


A PPC shows what
combinations of two products or types of products can be made given available
resources.  You can see, for example, what combinations of cars and bicycles can be made
or what combination of military goods and consumer goods.  It shows what combinations
are efficient, inefficient, and impossible.  By looking at what combination a country is
producing, you can see whether its output is efficient or
not.


The problem is that a PPC only measures combinations
of two things.  Countries produce more than two kinds of goods and therefore it is hard
to use a PPC to really look at the whole of a country's output.

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