International Trade Theory and Policy
by Steven M. Suranovic
Trade 60-2
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The Production Possibility Frontier (Fixed Proportions Case)The production possibility frontier can be derived in the fixed proportions case by using the exogenous factor requirements to rewrite the labor and capital constraints. The labor constraint with full employment can be written as,
The capital constraint with full employment becomes,
Each of these constraint contains two endogenous variables QC and QS. The remaining variables are exogenous.
The red line is the labor constraint. The endpoints The blue line is the capital constraint. The endpoints The production possibility frontier is the set of output combinations which generate full employment of resources - in this case both labor and capital. Only one point, point E, can simultaneously generate full employment of both labor and capital. Thus point E is the PPF. The production possibility set is the set of all output combinations that are feasible. The PPS is the area bounded be the axes and the interior section of the labor and capital constraints. Thus at points like A there is sufficient labor to make production feasible but insufficient capital, thus point A is not a feasible production point. Similarly, at point B there is sufficient capital but not enough labor. Points like C however, which lie inside (or on) both factor constraints do represent feasible production points. Note that the labor constraint is drawn with a steeper slope than the
capital constraint. This implies,
International Trade Theory and Policy - Chapter 60-2: Last Updated on 7/31/06 |