Answer to Question #130973 in Macroeconomics for dsbdjabxnbd

Question

Question 2: A country might want to produce more of capital goods as they will create a future stream of benefits whereas consumer goods are consumed immediately having no long term benefits- Comment on the country’s production possibility curve. [10]

Answer 1

        Production possibility curve(PPC) is used by macro-economists to relate and analyze the economic implication of opting to produce a combination of goods or choosing one among them. These are in consideration that the products in comparison are given full resources that are in turn efficiently utilized per unit time. The point below the PPC curve are attainable but are considered inefficient while those points above the PPC are unattainable. However, points along the curve are attainable and most efficient.

A country that would want to produce more capital goods with a target to enjoy long term benefits as opposed to the production of consumer goods would assume a common PPC with increasing opportunity cost when attention is given to either of the goods.

From the curve below, producing or specializing more on capital goods could result in the diversion of trading activities towards it and away from consumer goods. The opportunity cost of capital goods will be seen to increase as most traders shall turn to trade it. Increased opportunity cost can be a result of the increased injection of resources in producing capital goods which are less efficient in its production.

Capital goods production is crucial for they increase the production capacity of an economy in the long run. Improved living standards is thus realized. The expanding economy can be represented by the shift of PPC to the right.