![]() The difference between actual output and potential output when an economy is producing less than full employment output when there is a negative output gap, the rate of unemployment is greater than the natural rate of unemployment and an economy is operating inside its PPC. The difference between actual output and potential output when an economy is producing more than full employment output when there is a positive output gap, the rate of unemployment is less than the natural rate of unemployment and an economy is operating outside of its PPC. The straight line in the business cycle model, which is usually upward sloping and shows the long-run pattern of change in real GDP over time The level of output an economy can achieve when it is producing at full employment when an economy is producing at its potential output, it experiences only its natural rate of unemployment, no more and no less. When GDP begins to increase following a contraction and a trough in the business cycle an economy is considered in recovery until real GDP returns to its long-run potential level. The turning point in the business cycle between a recession and an expansion during a trough in the business cycle, output that had been falling during the recession stage of the business cycle bottoms out and begins to increase again. The turning point in the business cycle between an expansion and a contraction during a peak in the business cycle, output has stopped increasing and begins to decrease. The phase of the business cycle during which output is falling The phase of the business cycle during which output is increasing The total supply of goods and services produced by a nation’s businesses The total demand for a nation’s output, including household consumption, government spending, business investment, and net exports 21.3) This is so because at U the economy will be under-employing its resources and H is beyond the resources available.A model showing the increases and decreases in a nation’s real GDP over time this model typically demonstrates an increase in real GDP over the long run, combined with short-run fluctuations in output. For example, the combined output of the two goods can neither be at U nor H. It is to be remembered that all the points representing the various reduction possibilities must lie on the production possibility curve AF and not inside or outside of it. The production possibility curve is also called transformation curve, because when we move from one position to another, we are really transforming one good into another by shifting resources from one use to another. In this diagram AF is the production possibility curve, also called or the production possibility frontier, which shows the various combinations of the two goods which the economy can produce with a given amount of resources. ![]() The following diagram (21.2) illustrates the production possibilities set out in the above table. This is due to the basic fact that the economy’s resources are limited. This means that, in a full-employment economy, more and more of one good can be obtained only by reducing the production of another good. As we move from A to F, we sacrifice increasing amounts of cotton. At B, the economy can produce 14,000 quintals of wheat and 1000 quintals of cotton.Īt C the production possibilities are 12,000 quintals of wheat and 200u quintals of cotton, as we move from A to F, we give up some units of wheat for some units of cotton For instance, moving from A to B, we sacrifice 1000 quintals of wheat to produce 1000 quintals of cotton, and so on. These are the two extremes represented by A and F and in between them are the situations represented by B, C, D and E. If, on the other hand, all available resources are utilized for the production of cotton, 5000 quintals are produced. Draw a correctly labeled graph of the production possibilities curve, with consumer goods on the horizontal axis and capital goods on the vertical axis. It all available resources are employed for the production of wheat, 15,000 quintals of it can be produced. The following table gives the various production possibilities. ![]() We suppose that the productive resources are being fully utilized and there is no change in technology. ![]() Let us suppose that the economy can produce two commodities, cotton and wheat. If it is decided to produce more of certain goods, the production of certain other goods has to be curtailed. In other words, the economy has to choose which goods to produce and in what quantities. The productive resources of the community can be used for the production of various alternative goods.īut since they are scarce, a choice has to be made between the alternative goods that can be produced. The production possibility curve represents graphically alternative production possibilities open to an economy. ![]()
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