Question

Although a production possibilities frontier is usually drawn for a country, one could be drawn for the world. Picture the world’s production possibilities frontier. Is the world positioned at a point on the PPF or below it? Give a reason for your answer.

Answer 1

A production possibility curve represents a combination of those goods and services which any economy can produce given the current resources which it has in possession. Any combination along the production possibility curve is regarded to be efficient and below the production possibility curve is regarded as inefficient for the country.

When looking at the world as a whole, we realize that it has multiple resources which can be utilized to produce different types of goods. Now, if the world were to engage in production of the same. it had different combinations to choose from. Yet, there is a common belief that the existence of practices such as trade restrictions, taxes, tariffs and bad relationships among countries prohibit each one as part of a larger world from trading and interacting with one another. Due to this very concept of restrictions, the world economy does not produce at its ideal conditions and the production possibility happens at a point well below the production possibility curve.

This can be explained graphically as follows: -

Here in the graph above, we see that the production possibility curve which is maximum is indicated along the graph. Points 1 2 and 3 depict various combinations of agricultural goods and capital goods that can be produced over a period of time. Point 4 depicts the current level of production of the world which is lesser than the optimum condition due to the existence of tariffs and taxes.

Thus, we can conclude that even though the world has a possibility which is higher than the current levels, yet the overall production is lesser as the world sees conditions such as taxes and tariffs and relationships with all countries may not be similar to encourage exchange and higher production levels.

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