Microeconomics web activities and learning outcomes

Economics Questions; Production Possibility Curves and Nonresidential Investment

Using the data from Heritage Org, the countries with ranked in 1st, 51st and 101st were identified and information provided was used complete the following table. For the country ranked in 101st place there was no data ranked at 101st for the unemployment rate given, however, if a figure is required, trading economics provide the last available data which places the unemployment level at 1% which was measures in 2010 and is assumed to remain correct (Trading Economics, 2013).

Ranked #1

Ranked #51

Ranked #101

Country Name

Hong Kong

Israel

Benin

GDP

$351.1 billion

$235.2 billion

$14.7 billion

Unemployment

n/a

Government Spending as a percent of GDP

45%

Growth rate of GDP

5%

Part B

It is possible to use the data to drawn draw some production possibility curves. A production possibility curve, which is also referred to as a production possibility frontier is a curve which shows the potential total output for a nation against a combination of two different types of goods or services which may be produced if all of the countries resources were being used in the most effective manner. It is important to note that possibility production curves are a theoretical tool, as not nation is likely to ever operate at its optimal efficiency. For example in all the cases above, there is some inefficiency caused by the presence of unemployment; so some labor is not being fully utilized.

To draw the curve it is necessary to make an adjustment. If the curve is the maximum potential output, then the first adjustment needs to be the assessment of the full potential GDP with no unemployment. This is adjusted assuming that the current level is less than 100%. For example, Benin has 1% unemployment, so this means there is 99% employment. The current GDP is divided by the current employment rate, and then multiplied by 100, to get the theoretical GDP if everyone were employed. The calculations are presented below in table 1. It is assumed that the government spending remains at the same level of GDP.

Table 1 Adjustment Calculated for Drawing the Production Possibility Curves

Adjustments

Hone Kong

Israel

Benin

Current GDP

14.7

Current unemployment

3.4

6.9

1.0

Proportional GDP with no unemployment (adjusted)

14.85

Current government spending percentage

19.20%

45%

21.60%

Government spending at adjusted GDP

67.41

3.18

Consumer spending at current government spending levels

11.52

When drawing the graphs it is usual for the line to be concave, as when 100% of all resources are used for the production of one type of good or service there may be a loss of efficiency. However, there is insufficient data, and production possibility corves may also be draw as a straight line, where it is assumed one unit less of one good may provide for one unit more of the alternate good (Nellis and Parker, 2006). The curves for the countries are shown below, with a point marked on the line for the current level of government spending. In all cases there is the adjustment for unemployment, and the higher the unemployment the greater the potential for improvement with the current point further fro the curve.

Figure 1; Production Possibility Curve for Hong Kong

Figure 2; Production Possibility Curve for Israel

Figure 3; Production Possibility Curve for Benin