Answer to Question #285968 in Macroeconomics for Snow

Question

Using a production possibilities frontier (PPF) diagram, determine how does the PPF change in response to the following events: Make sure to explicitly indicate what sectors you are representing, and what sort of assumptions each event implies (i.e., a neutral effect vs a sector-biased effect). The latter follows from your assumptions on the factor intensity of the sector you are representing. a) Increasing skilled migration into the country b) Imposing taxes on manufacturing (hint: define a two-sector producing economy, manufacturing and services). c) Decreasing the expenditure on research and development d) Implementation of easier rules for foreign investment e) The effects of a pandemic

Answer 1

Production possibility frontier (PPF) is the diagrammatic representation of all the combinations of goods that can be produced in a two commodity setup, given the amount of resources available to the economy. The points on PPF depict all the combinations which efficiently utilize the available resources to the economy.

When the resources available in the economy increases, the PPF shifts outside. When the resources reduce, the PPF shifts to the left.

Increase in skill migration would lead to an increase in the efficiency of production. Hence, more goods can be produced utilizing the same available resources. Therefore, the PPF would shift to the right indicating an expansion of the economy.

Let there be two sectors in the economy- the manufacturing sector (vertical axis) and other sectors (horizontal axis). When taxes are imposed on the manufacturing sector, the production of the manufacturing sector shrinks at each point. Hence, the PPF rotates in an anticlockwise direction as shown in the diagram below.

A decrease in research and development would lead to a decline in the efficiency of the economy. Hence, the production of both the goods will be more inefficient. The economy will require more resources to produce both the goods. Therefore, the PPF would shift to the left as shown in the diagram below.