Question

Assuming a Heckscher-Ohlin framework, suppose the production of one unit each of Wheat and Cloth require the following units of Labour and Land:

Goods Units of labour Units of land

Wheat per bushel 3 9

Cloth per yard 6 1

The economy is endowed with 120 units of labour and 180 units of land. a. Draw the production possibilities frontier of this economy. b. If the supply of land increases by 90 units, how does the production possibilities frontier change? What is the implication of this result?

Answer 1

Given: These are the units of labor and land required to produce wheat per bushel and cloth per yard.

a.) Therefore the maximum potential of the economy when it devotes all of its land and labor to produce one good, and produce nothing of the other is:

Bushels of wheat produced =

Therefore when the economy devotes all of its labor and land to the production of wheat, it produced 60 bushels of wheat.

Yard of cloth produced:

Therefore when the economy devoted all of its land and labor to the production of cloth, it produces 200 yards of cloth.

Therefore we have the intercepts of the production possibility frontier. It shows all the combinations of two goods that the economy could produce with the given resources (land = 180 and labor = 120).

Therefore we have the x and y intercepts to form the Production Possibility curve (PPF). Where we put wheat on the x-axis and cloth on the y-axis.

The x-intercept is where the economy devotes all of its land and labor to the production of wheat.

x-intercept = 60

The y-intercept is where the economy devotes all of its land and labor to the production of cloth.

y-intercept = 200

Two points of PPF = (60 bushels of wheat, 0 yards of cloth); (0 bushels of wheat, 200 yards of cloth)

Therefore by plotting these two points, we have the production possibility curve:

b.) Now the supply of land increases by 90 units.

Therefore the total land is = 180 + 90 = 270

Now, we can again find the maximum potential of the economy to produce wheat and cloth when it devotes all of its land and labor to each alone.

Bushels of wheat produced =

Therefore when the economy devotes all of its labor and land to the production of wheat, it produced 70 bushels of wheat.

Yard of cloth produced:

Therefore when the economy devoted all of its land and labor to the production of cloth, it produces 290 yards of cloth.

New PPF:

Therefore we have the x and y intercepts to form the new Production Possibility curve (PPF). Where we put wheat on the x-axis and cloth on the y-axis.

The x-intercept is where the economy devotes all of its land and labor to the production of wheat.

x-intercept =70

The y-intercept is where the economy devotes all of its land and labor to the production of cloth.

y-intercept = 290

Therefore by plotting these two points, we have the new Production Possibility Curve:

Two points of New PPF = (70 bushels of wheat, 0 yards of cloth); (0 bushels of wheat, 290 yards of cloth)

Therefore by plotting these two points, we have the new production possibility curve:

The implication of increased land units:

Because of the increase in the land units, the production possibility frontier shifts to the right. As the resources of the economy increase, therefore the economy now could produce more wheat and cloth. The increase in the resources increases the productive capacity of the economy and therefore the economy shifts to producing more units of both goods. (here, wheat and cloth).

As we can see that now the economy is being able to produce more of both goods. Therefore the implication of the increase in the land units, the economy gets to produce and consume more wheat and cloth. Therefore the PPF of the economy shifts to the right showing more quantities of both goods.