Assumptions of Production Possibility Model
Following are the assumptions of production possibility model;
Productive inefficiency and unemployment.
If economy is productively inefficient and is not using all the resources (Unemployment) then that economy will not lie on production frontier but rather inside it.
Resources expand with the passage of time, population increases; new sources of energy are discovered.
Similarly technology also changes with time this means either new, better products or better ways of producing them. Here changing technology means better equipment and machinery etc.
Under both increase in resources and better technology, production possibilities curve expands and shifts to right.
This means growth of an economy so generalization is:
“A static no growth economy has to sacrifice some of one product to get mole of another product while dynamic growing economy can have large quantities of both the products.”
This does not mean that the growth is same for all goods and services some goods can increase by 100% while other by only 20%. How much production frontier will expand depends on current choice of an economy on production frontier. If the goods for future is focused then production curve will expand more.
Qualification: International trade and Specialization
Production possibilities analysis assumes that the economy is limited to output shown by production possibilities curve.
But in reality, International trade and specialization help an economy to expand its output. Directing domestic resources to products that an economy efficiently produces.
International trade and specialization has the same effect as increase in resources or improvement of technology and results in economic growth.
Ability to increase in total output is called economic growth.
February 22, 2019