Question

UNIT 2: PPF, TRADE, SPECIALIZATION

The Production Possibilities Frontier is a simple economic model used to illustrate a complex economic reality of productive possibilities of one economy. The PPF is an economic frontier of maximum production of two (2) goods based on available resources and the state of technology. The PPF assumes the economy is using all its resources and is using them efficiently.

Consider this scenario: The U.S. is productive efficient in its economy. It is highly diversified and enjoys economic growth. This year, the U.S. economy changes from a highly diversified one to a specialized one focused on the production of two (2) goods, oil (energy sector) and corn (agricultural sector).

DISCUSSION QUESTION

Given the breadth of the U.S.'s economic resources which were fully employed in its highly diversified economy, do you expect the economy will continue to grow annually (as it did previously) and be productive efficient?

INSTRUCTIONS:

• Your comments should connect PPF framework (changes and economic concepts) to the change noted to the U.S. economy (highly diversified to specialized with 2 products/goods).
• Do you anticipate growth in a specialized productive economy?
• Will economic resources be fully employed?
• Your post should be no more than 200 words.

Answer 1

Case Specifics Covering All Questions

Given the interconnected nature of the world in which most countries tend to find it difficult to work independently without the influence of one another, diversification is very essential and would lead to higher growth rates when compared to a country which is restricted in trade of two goods only.

A production possibility curve only allows for production of two goods to be monitored as demonstrated in the case study. It typically involves different combinations of two products without having any consideration for diversification. Hence the theory in itself is very limited in approach as in real life countries produce more than 2 sets of goods and services respectively thus having a higher growth rate when they are diverse than when they specialize in two products only.

Even oil rich countries in the Middle East do not rely on it as the only source of earning revenue as realistically growth of numerous industries is important to allow for economic resources to be allocated to multiple areas so that they can be used to their best use than restricting them to two products or services only.

Therefore, the case clearly highlights that having a diverse economic structure is better than that of having a two product based economy since it makes the economy very vulnerable and growth opportunities are reduced.

Also in actuality a two product based economy is hard to exist and the concept is only theory based in nature

For reference:-

A typical Production Possibility curve is as follows:-

Points A,B & C indicate attainable combinations of both products in the case whereas a point bellow the same would indicate under employment of resources whereas a point outside is not attainable respectively.

Please feel free to ask your doubts in the comments section if any.