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    Hello,

    Does anyone know how an economy can produceOutside its production possibility frontier?

    I don't mean a shift to the right of the LRAS, I just mean a temporary positive output gap.

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    In this case producing at D
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    (Original post by ThePersian)
    Hello,

    Does anyone know how an economy can produceOutside its production possibility frontier?

    I don't mean a shift to the right of the LRAS, I just mean a temporary positive output gap.

    Name:  prodcurve.gif
Views: 1386
Size:  11.2 KB


    In this case producing at D



    when you bring in imports into the country, you are using resources that are not a part of your productive capacity (not within PPF) so in the case of imports the PPF would be at point D.

    at least temporarily
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    I didn't think it was possible:
    I always thought the PPC/PPF shows the MAXIMUM output of a combination of two types of products that can be produced efficiently with a country's existing resources and technology. The edge of the PPC is 100% efficiency so to go beyond that you'd need better quality/more resources.
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    You cannot (under any circumstances) produce outside the PPF. In order to shift the PPF outwards you need improvement of technologies.
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    An economy can only temporarily produce outside of it's PPF. This can come about by people working overtime, or capital being overused. However this cannot be sustained as the capital would likely break, whilst the people would become tired and inefficient.
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    (Original post by Hewitt)
    An economy can only temporarily produce outside of it's PPF. This can come about by people working overtime, or capital being overused. However this cannot be sustained as the capital would likely break, whilst the people would become tired and inefficient.
    No no no, that is impossible. I don't mean to sound horrible but you cannot produce outside the PPF. Yes, you are right in the fact you can increase efficiency. But you cannot produce more than productive efficiency (you can't make more of one good with making less of another).

    Since productive efficiency is where the PPF point lies on its boundary, therefore you cannot produce outside the boundary.
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    (Original post by samboJ)
    No no no, that is impossible. I don't mean to sound horrible but you cannot produce outside the PPF. Yes, you are right in the fact you can increase efficiency. But you cannot produce more than productive efficiency (you can't make more of one good with making less of another).

    Since productive efficiency is where the PPF point lies on its boundary, therefore you cannot produce outside the boundary.
    Nope it is possible for an economy to produce outside it's ppf for short periods of time.
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    Thanks for all your replies.
    I'm 100% sure you can produce outside the PPF.
    But, I wasn't sure how. Imports could do that.
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    (Original post by ThePersian)
    Thanks for all your replies.
    I'm 100% sure you can produce outside the PPF.
    But, I wasn't sure how. Imports could do that.
    An economy cannot produce outside its PPF. This is deliberately by definition. Any production at a point outside PPF would only be attained by shifting the PPF out as far as that point, which would put that point within or on the PPF. This could be done by such things as increasing the population, or by advances in technology.

    An economy can consume outside the PPF, however. This can be done by engaging in foreign trade. If a country produces and exports goods that it has a comparative advantage in, and imports goods that it has a comparative disadvantage in, the resulting consumption level could be outside that country's PPF.

    Please, look. I'm not a fool.
    :cool:
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    Yes it is possible in the short run.
    Lets assume that we are at full employment and the economy is pareto efficient.
    We can go outside of the PPF by doing overtime. However this can only be maintained for a short period of time. After this it will fall back to the original position!
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    (Original post by dan94adibi)
    Yes it is possible in the short run.
    Lets assume that we are at full employment and the economy is pareto efficient.
    We can go outside of the PPF by doing overtime. However this can only be maintained for a short period of time. After this it will fall back to the original position!
    The overtime could be maintained though.

    Positive output gap occur when worker expectation of the price level is less than the actual price level. Therefore they bargain for too lower wage. Thus the wage for labour is lower. Thus firms employ more labour and produce more output. When workers adjust their price expectations they bargain for a higher wage. This reduces employment and therefore output falls back to the natural level.

    However this is not a-level theory so do not use it in an a-level exam.
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    (Original post by ThePersian)
    Hello,

    Does anyone know how an economy can produceOutside its production possibility frontier?

    I don't mean a shift to the right of the LRAS, I just mean a temporary positive output gap.

    Name:  prodcurve.gif
Views: 1386
Size:  11.2 KB

    In this case producing at D
    It is impossible for an economy to produce outside of its ppf with current resources and technology. However, PPF can change with new resources and advancement in technology means it can grow larger but you cannot produce outside of ur ppf.

    Buy yes it is possible for an economy to consume outside of its PPF. We can do that by trading with other countries and specialization. If a country exports goods in which he has a comparative advantage and imports good that he has a comparative dis advantage in.the country can consume outside of its ppf

    Hope that helps
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    An economy can produce beyond it's PPF (a to b) - but Classical economics assumes this only occurs in the SR.

    For instance even unemployment occurs when the economy is at full capacity.
    That is - the natural rate of unemployment (e.g frictional unemployment). Workers may also be worked over time to produce beyond capacity in the SR.

    However in the LR, the economy returns to it's capacity, but at a higher price level according to this Classical model (b to c). It is unsustainable to assume workers will continue to work overtime in the LR, and workers will respond to the increased AD by demanding higher wages in the LR - the price level therefore increases. SRAS decreases as illustrated

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    (Original post by samboJ)
    You cannot (under any circumstances) produce outside the PPF. In order to shift the PPF outwards you need improvement of technologies.
    Except in the SR
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    (Original post by samboJ)
    No no no, that is impossible. I don't mean to sound horrible but you cannot produce outside the PPF. Yes, you are right in the fact you can increase efficiency. But you cannot produce more than productive efficiency (you can't make more of one good with making less of another).

    Since productive efficiency is where the PPF point lies on its boundary, therefore you cannot produce outside the boundary.
    Have you not studied the classical model?

    An economy can produce beyond it's productive potential in the short run.

    For instance even unemployment occurs when the economy is at full capacity.
    That is - the natural rate of unemployment (e.g frictional unemployment). Workers may also be worked over time to produce beyond capacity in the SR.

    However in the LR, the economy returns to it's capacity, but at a higher price level according to this Classical model (b to c). It is unsustainable to assume workers will continue to work overtime in the LR, and workers will respond to the increased AD by demanding higher wages in the LR - the price level therefore increases. SRAS decreases as illustrated

    Your response is claiming that positive output gaps are not possible, therefore ignoring the trade cycle. Fair enough if you were claiming this was the long run. But you are confidently making this statement with no distinction of SR and LR - which is incorrect.
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    This is an old thread
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    Locked. Please don't bump old threads
 
 
 
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