Essay on "Production Possibilities Curve"

Essay 4 pages (1272 words) Sources: 4

[EXCERPT] . . . .

Production possibilities curve is "a graphical representation of the alternative combinations of goods and services an economy can produce" (Rittenberg & Tregarthen, 2009). When an economy is producing a level that has some inefficiency, it is producing below the production possibilities frontier. Trade barriers represent one form of market distortion from which inefficiency derives. Consider Ricardo for a moment, that under the theory of comparative advantage nations will produce more when they have free trade in the goods and services for which each has a comparative advantage (Landsburg, 2007). When such trade is restricted -- as occurs when there are trade barriers -- an economy will produce below its maximum efficiency. As a result, when these trade barriers are removed, the economy moves closer to its production possibilities frontier.

Removing trade barriers can also cause the production possibilities frontier to shift outward, representing an increase in the economy's potential production. The reason for this is that when an economy has increased access to different resources, the economy can use the resources that it already has in a more productive way. These synergies -- such as when developing world nations removed barriers to capital flows, bringing in foreign direct investment to couple with their labor and natural resources -- allow the nation to produce more with its resources than would otherwise be possible.

2. Rittenberg and Tregarthen (2009) argue that an economy operating inside its production possibilities curve could improve its performance. Such an economy is not fully using the resources available to it, and when it does utilize resources it is not utilizing them on the basis of comparative advantage. Economies that operate inside the production possibilities frontier, therefore, can produce more of all the goods and services that people value, thereby increasing availability of those goods and the national standard of living (Ibid).

3. There are two factors that could cause the production possibilities curve to shift outward, representing an increase in the economy's potential output. The first is through the acquisition or discovery of new resources. So for example when China invaded Tibet, it gained access to the mineral and water resources of that nation. When Britain handed Hong Kong back to China, that move saw China gain access to Hong Kong's knowledge and capital. Both instances saw China's production possibilities frontier pushed outward. Free trade also helps a nation can access to new resources. For example, if an economy can produce more with the help of machinery, then it needs to import oil to run that machinery. By doing so, the productive capacity of the economy will increase. Nations in the West often bring in new labor in the form of immigrants, and this increases the productive capacity on the nation.

The second reason why the production possibilities curve would expand outwards is through the introduction of new technology that improves efficiency. The development of the assembly line was an early example of expanded production owing to innovation. New technology and innovation allows for economies to utilize their resources more efficiently, and this allows for the same resources to result in more production. These two factors -- an increase in the factors of production and an increase in efficiency allow a nation to expand its production possibilities frontier.

4. Among the objectives that underpinned the creation of the European Union was the idea that nations with strong trade ties are unlikely to wage war on one another. Another idea is that the nations on the continent needed to increase their wealth rapidly, to restore their devastated economies. Thus, the European Union has resulted in entirely deregulated trade among its member nations (Rittenberg & Tregarthen, 2009). This allowed the nations within the Union to take better advantage of comparative advantage. An example cited in the case is that Germany makes high-end automobiles while Spain… READ MORE

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