“c01ThinkingLikeAnEconomist_PrintPDF” — 2022/7/18 — 23:09 — page 21 — #19
The PPD can illustrate the growth of an economy
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Economic growth occurs when the total volume of goods and services produced by a nation rises between one year and the next. For a country already on its PPF, this can happen if the quantity (volume) or efficiency (quality or productivity reflecting output per unit of input) of resources available to a country increases and there is a rise in technical or productive efficiency. This could occur if there were new discoveries of minerals, better technology, improved worker efficiency, higher levels of foreign investment, immigration of skilled workers, better education or increases in people’s skills. Such developments cause a rise in the country’s productive capacity so that the PPF (potential GDP level) grows in size and shifts outwards (perhaps parallel to the original frontier), creating a brand new frontier. This is shown in Figure 1.10 by the shift from PPF 1 to PPF 2. If this occurs, production levels previously unattainable may now become attainable.
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FIGURE 1.10 Using the production possibility diagram to show the effect of increasing the volume or efficiency of resources available on the economy’s capacity and potential level of national output.
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PPF 2 shows the growth of a country’s productive capacity from the original level at PPF 1, perhaps due to a rise in the volume or technical efficiency of the nation’s resources available.
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Annual national production of goods (million units)
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PPF 1 represents a country’s original productive capacity before the increase in the volume and efficiency of resources available.
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2 4 6 8 10 12 14 Annual national production of services (million units)
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TOPIC 1 Thinking like an economist
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