Answer to Question #63169 in Macroeconomics for Lucas

Question

Hello,

I have a question about production possibilities and outward shifts regarding the Production Possibilities Frontier (PPF). Does an investment in infrastructure increase a country's production possibilities? For example, I am looking at a railway that has been built by China in Ethiopia as a part of their foreign aid program
(http://www.france24.com/en/20161005-chinese-built-railway-opens-linking-ethiopia-djibouti)
Since improved transportation infrastructure only opens up new markets and speeds up delivery times, I am not sure if it counts towards creating more production possibilities, since it has nothing to do with the process of extracting the raw materials in the first place, just transporting them. Could i show the effects of the railway on a PPF or not?

Thank you for your time.

Answer 1

An investment in infrastructure increases a country's production possibilities. In this case a railway that has been built by China in Ethiopia as a part of their foreign aid program, will improve transportation infrastructure, which opens up new markets, speeds up delivery times and decreases the cost of transportation, that increases productivity and creates more production possibilities.
That's why you can show the effects of the railway on a PPF as a rightward shift.