Question

Suppose the Island of Cornucopia which produces wheat and tractors is hit by a severe recession. Explain how this would affect their production possibilities frontier. Now contrast this with their neighboring Island, Treasure’s economy that was hit by an earthquake that killed thousands of their citizens. How would their production possibilities frontier get affected? Using economic theory, explain your answer clearly, logically, and succinctly.

Answer 1

In the first case, the PPF will not be affected at all, only the point of production will be affected. The PPF of a nation represents the production capacity of that economy when there is a recession in the economy it will decrease the total output and the nation will produce at a lower output but the production capacity will be same i.e. they can increase the production when ever they want.  

IN the secong case, the PPf will shift inward i.e. the earthquake will destroy the production capacity and the PPF will represent that. It will move inwards. As thousands have been killed labor force will be affected and the nation will suffer a loss of the labor force the PPF will move inward for the labor intensive product.