Question

PPFs revisited

a. A relatively poor country with wide, beautiful beaches bordering warm ocean water can produce two goods: tourism and agricultural products (food, cotton, etc). Let’s call it Beautiful Island, BI. In recent years, the finance minister of the country has advocated construction of more and more tourist hotels. But economic advisors from an NGO advise instead that the country focus on increasing its agricultural productivity through crop rotation, use of fertilizer, and other methods. Use the Production Possibilities Frontier model and the axes at right to illustrate this debate. Put “tourism” on the vertical axis and “agricultural products” on the horizontal axis. Select some point to illustrate where the economy is initially. What changes does the finance minister want to see? What changes do the NGO advisors want to see? Explain your answers

b. This beautiful beachfront country (BI) establishes a trade relationship with a wealthy nearby land-locked not-atall-beautiful country (let’s call it Ugly Mainland, UM). The land-locked country (UM) produces agricultural products and does so at a lower opportunity cost than does the beachfront country (BI). Assuming transportation costs are relatively low, how will production and consumption in the beautiful beachfront country(BI) change? Explain.

c. After trade relations had begun, a large tsunami struck the beachfront country (BI) and destroyed over half of the tourist hotels. How will this affect BI’s PPF? What will happen to BI’s production? To its opportunity costs of producing food? Will BI continue to trade with UM? Discuss.

Answer 1