Question

Consider the Production Possibilities Frontier (PPF) for a country, Theophili. Using a diagram, show whether each of the following events causes the PPF to contract, expand, or not change at all. Assume that Theophili can either produce candles or liturgical books.

a) The country experiences immigration of skilled workers.

b) An earthquake destroys half of the country’s factories, and kills half of its workers.

c) A new technology improves the production process of both candles and liturgical books.

d) Theophili transitions from a dictatorship to a democracy with well-entrenched property rights.

e) The country introduces tariffs (taxes) on imports, hence reducing its trade with other nations.

Answer 1

a) PPF changes when the scarce resources and the technology used in production of the good changes. Here, country experiences immigration, which increases the scarce resource labor. There are more workers to work with. So, PPF will expand.

b) If an earthquake destroys half of the country's capital stock and labor force, the total amount of production will decrease. PPF will shift to the left.

c) New technology will improve the production process and thus producing more output. Therefore, PPF will expand outwards

d) An enhanced property rights will not increase the productivity or output. Therefore, the PPF will remain unchanged.

e) When a country imposes tariffs on imports, the trade volume decreases. This will cause the nation to produce less output as it will produce for domestic market more. PPF contracts.