Economic Growth, PPF, and the Tradeoff Between Capital and Consumer Goods

Economic Growth Process by which a nation's wealth increases over time. The most widely used measure of economic growth is the real rate of growth in a country's total output of goods and services (gauged by the gross domestic product adjusted for inflation, or "real GDP per capita"). Other measures (e.g., national income per capita, consumption per capita) are also used. The rate of economic growth is influenced by natural resources, human resources, capital resources, and technological development in the economy along with institutional structure and stability. Other factors include the level of world economic activity and the terms of trade.




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PPF

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If a firm can produce two or more outputs or can produce output in two or more periods, a production possibility frontier can describe the possible combinations of output that can be attained for a given set of inputs.

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In economics, the production possibility frontier (the PPF, also called the production possibilities curve (PPC) or the “transformation curve”) is a graph that depicts the trade-off between any two items produced or groups of products. It indicates the opportunity cost of increasing one item's production in terms of the units of the other forgone.



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Tradeoff Between Capital and Consumer Goods

Investment involves a tradeoff between producing capital goods and consumption goods. Resources used to produce capital goods (which expand the economy's production capabilities and shift out the production possibilities frontier) cannot be used to produce consumer goods (which provide for the immediate satisfaction of wants and needs). This is one of the most fundamental tradeoffs in the economy. To produce more in the future, the economy must accept less satisfaction in the present.
The capital-consumption trade off can be illustrated with two goods crab puffs and storage sheds. Crab puffs are a consumer good (feeding hungry party guests), and storage sheds are a capital good (often used by businesses to store productive inputs).





Selecting an Option

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The production possibilities curve presented here illustrates the tradeoff between crab puffs and storage sheds. Consider these alternatives:
  • If the economy chooses to produce at point A (0 sheds and 450 dozen crab puffs), then it is doing NO investing. It is giving up no consumption goods. All resources are being used to satisfy current consumption.

  • If the economy decides to move from point A to point E, then it IS investing. This move means the production of 4 sheds at a cost of giving up 40 dozen crab puffs.

  • Further investment can be had by moving from point E to point I. This move increases the number of sheds produced from 4 to 8, but the cost of the additional 4 sheds is 140 dozen crab puffs.
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At which point should the economy produce? A? E? I? Or another? That choice depends, in part, on the resulting shift of the curve and what this means for future production possibilities as well as the needs of the economy today. Societies want to achieve economic growth because it will shift the PPF outward and enable the economy to produce more capital and consumer goods, increasing consumption today and in the future.



References

http://www.amosweb.com
Macro Text Book
Class Notes.
Example provided by Amosweb Econ site

Daniel Sokorinski