Question :

Suppose we can divide all the goods produced by an economy into two types: consumption goods and capital goods. Capital goods, such as machinery, equipment, and computers, are goods used to produce other goods.

a. Use a production possibilities frontier graph to illustrate the trade-off to an economy between producing consumption goods and producing capital goods. Is it likely that the production possibilities frontier in this situation would be a straight line or bowed out? Briefly explain.

b. Suppose a technological change occurs that has a favorable effect on the production of capital goods but not consumption goods. Show the effect on the production possibilities frontier.

c. Suppose that country A and country B currently have identical production possibilities frontiers but that country A devotes only 5 percent of its resources to producing capital goods over each of the next 10 years, whereas country B devotes 30 percent. Which country is likely to experience more rapid economic growth in the future? Illustrate using a production possibilities frontier graph. Your graph should include production possibilities frontiers for country A today and in 10 years and production possibilities frontiers for country B today and in 10 years.