The Macro Economy Today 14th Edition Bradley Schiller

12 THE ECONOMIC CHALLENGE
FIGURE 1.5
Growth: Increasing Production
Possibilities
A production possibilities curve
is based on available resources
and technology. If more resources
or better technology becomes
available, production possibilities
will increase. This economic
growth is illustrated by the shift
from PP 1
to PP 2
.
OUTPUT OF TRUCKS (per day)
PP 2
PP 1
More resources or
better technology expands
output limits.
0
OUTPUT OF TANKS (per day)
but no one hired them. As a result, we were stuck inside the PPC, producing less output than
we could have. The goal of U.S. economic policy is to create more jobs and keep the United
States on its production possibilities curve.
economic growth: An increase in
output (real GDP); an expansion of
production possibilities.
Economic Growth
The challenge of getting to the production possibilities curve increases with each passing
day. People are born every day. As they age, they enter the labor force as new workers.
Technology, too, keeps advancing each year. These increases in available labor and technology
keep pushing the producing possibilities curve outward. This economic growth is
a good thing in the sense that it allows us to produce more goods and raise living standards.
But it also means that we have to keep creating more jobs every year just to stay on
the PPC.
Figures 1.4 and 1.5 illustrate how economic growth raises our living standards.
Point X in Figure 1.4 lies outside the PPC. It is an enticing point because it suggests we
could get more trucks (five) without sacrificing any tanks (two). Unfortunately, point X
is only a mirage. All output combinations that lie outside the PPC are unattainable in
the short run.
In the long run, however, resources and technology increase, shifting the PPC outward,
as in Figure 1.5. Before the appearance of new resources or better technology, our production
possibilities were limited by the curve PP 1
. With more resources or better technology,
our production possibilities increase. This greater capacity to produce is represented by
curve PP 2
. This outward shift of the production possibilities curve is the essence of economic
growth. With economic growth, countries can have more guns and more butter.
Without economic growth, living standards decline as the population grows. This is the
problem that plagues some of the world’s poorest nations, where population increases every
year but output often doesn’t (see Table 2.1).
THREE BASIC DECISIONS
Production possibilities define the output choices that a nation confronts. From these
choices every nation must make some basic decisions. As we noted at the beginning of this
chapter, the three core economic questions are
• WHAT to produce.
• HOW to produce.
• FOR WHOM to produce.