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When an economy’s production is at its fullest, employment level rises and it can be said that economic growth has taken place. The shift of the production possibility frontier (PPF) outward shows how much more production is at the full employment level, which means more people can work. Generally, people think that the PPF is bowed out (concave to the source) and that economic growth happens when this bowed-out PPF moves outwards. Measuring the growth of the economy based on a shift in the bowed out PPF seems to be a problem that people don’t pay much attention to.
Economic Growth
Many people say that growth is when the output of a business rises for at least two consecutive quarters over a period. In the second sense of economic growth, an economy can make more when it has all of its limited resources. There can be a sign that an economy has more productive power if the country’s production frontier moves to the outside (PPF).
Economic development may be shown by categorising all items into consumer and capital goods. This is the simplest approach to demonstrate this. PPFs move outward when an economy has more capacity to make things, which means it can make more money.
What creates growth?
When you use a PPF, growth is shown by a curve that moves outward over time. A PPF that has shifted outward indicates that an economy has been able to produce more of everything.
These things could happen if the economy does some or all of them:
Employs new technology
You can make more money if you buy new technology because new technology is always more efficient and understands the need of the time. In the 18th and 19th centuries, many people started using “mechanisation,” which made it possible for the UK to make many things with very little money and become the world’s first fully industrialised country. Because new technology has been applied in the production process, China’s growth rate has been quite strong in recent years.
If not enough resources are spent to acquire items like vehicles and other things that make things operate, the economy will not be able to flourish. Even though capital goods get less valuable over time, some resources must be spent on capital goods for an economy to stay the same, much less grow.
Uses a labour division system to facilitate specialisation
A division of labour refers to how manufacturing may be divided into discrete jobs, allowing for the development of technology to aid production and allowing labour to specialise in a narrow range of activities. The PPF may be shifted outwards by implementing a division of labour and specialisation.
New production techniques are used
New manufacturing techniques may boost output potential. In the 1980s, for example, teamwork in the automobile industry decreased waste and increased productivity. Many industrial organisations’ productivity has increased considerably due to the widespread usage of computer-controlled production technologies such as robots.
Employs more people
An economy’s potential production is increased by increasing the number of the working population. Natural growth, in which the birth rate exceeds the mortality rate, or net immigration, in which immigration exceeds emigration, are two ways to accomplish this.
New raw materials are discovered
Key resource discoveries, such as oil, boost the economy’s production capability.
A PPF that has moved inward
When an economy loses or exhausts part of its limited resources, a PPF will move inwards. As a consequence, an economy’s productive capacity is reduced.
A PPF will shift inwards if
Resources run out
When nonrenewable resources, such as oil, run out, it may be less productive for an economy to utilise them. These events occur more rapidly due to the usage of ultra-efficient manufacturing technologies and when governments concentrate on producing items from nonrenewable resources rather than renewable ones.
If the growth rate is sustainable, future generations won’t be deprived of scarce resources, like nonrenewable resources, and a clean environment because of how quickly the world is growing.
Failure to invest
The capacity of an economy will be reduced if it doesn’t invest in human and real capital to make up for the loss of these resources. There is a lot of wear and tear on real capital, like machinery and equipment. Over time, this capital loses its effectiveness. It will be less productive for people to work if the output from real capital is less. Another thing that affects the quality and productivity of work is when people learn more new skills. If an economy doesn’t spend money on people and technology, its PPF will move inwards over time.
Damage to the infrastructure
There is a good chance that factories, people, communications, and other important things will be destroyed in a fight.
Natural disasters
Natural calamities, such as the 2005 Boxing Day tsunami or the 2010 Haiti earthquake, force an economy’s PPF to migrate closer to the earth’s core.
Investment and economic growth
Real investment is when you spend money that isn’t going to waste on things like machinery or other capital goods. As shown in the diagram, if an economy spends more time and money on making capital goods than making consumer goods, it will grow more than if it spends more time and money on making them.
To grow the economy in the long run, the economy needs to use more of its capital resources to make capital rather than buy things for people to use. People’s living standards fall short because resources are taken away from people’s own needs. However, increasing capital goods investment implies that more consumer products can be produced long-term. This implies that, in the future, living standards may grow more than they would have if the growing economy had not made such a short-term transaction. So, economies have to choose between high consumption levels in the short run and low consumption levels in the long run.
Conclusion
This study aims to look at the conditions for economic growth by using the equation of a bowed-out PPF and by assuming that technological progress is the same every time. When you want to measure, you need to figure out the equation for the PPF first, then.
