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Thursday, January 27, 2011

Explain with diagrams, how production possibility curves might be used in assessing a country’s economic performance.


Production Possibility Curve (PPC) is a graphical illustration that shows what assortment of goods and services an economy can produce with full employment of resources available at its disposal within specific time period assuming that only two goods are produced, resources are fully employed and technology within that time period remains constant.
In microeconomics, the PPC shows the options open to an individual, household, or firm in a two-good world. PPC has significant use in microeconomics as it is used by a farmer to decide how much a specific crop to grow in certain season, as well as government also use PPC to assess its economic performance.From a macroeconomic perspective, the PPC illustrates the production possibilities available to a nation or economy during a given period of time for broad categories of output.
PPC generally has two parts, part above and below frontiers. Combinations above the frontier are attainable combinations whereas combinations below frontier are attainable combinations. So an economy can only produce unattainable combinations of two goods if the frontier shifts outwards. This shows that outward shifting of PPC demonstrates improving economic performance since an economy cannot produce large quantity of goods without advancement in technology (or simply economic development). Similarly sometime economic catastrophe may prevent an economy from producing desired goods resulting market failure (such as imperfect competition, externalities). Under such circumstances, PPC shifts inward demonstrating incapable economic system. It can be explained more easily with figure below:


Here AB shows initial economic status of a country. However economic condition of a country doesn’t remain constant for long period of time. Sometimes country may improve in policies for trade and commerce, increment in skilled, adoptable and relatively low cost labor force, exploration of new natural resources. Under such circumstances an economy can produce high quality products at low cost. So PPC shift outwards to rectify economic advancement. In the figure AB curve shifts to PQ due to economic development.
However in some cases an economy may face economic disaster due to unfavorable political-legal environment for trade and commerce, unusual depletion of non-renewable resources, incapable government etc. so an economy pare down due to inevitable economic crisis. It results in inward shift of PPC.
In this way, PPC helps an economy to access its economic performance by the inward and outward shift of PPC.

1 comment:

  1. Thank you it ws a very good information and it wd helpful

    ReplyDelete

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