1. Describe how a country producing more capital goods rather than consumer goods ends up in the future with a PPF that is larger than a country that produces more consumer goods and fewer capital goods?
PPF (Production Possibility Frontier) shows the maximum production level in the economy, assuming that the country produces only two products, which share same resources, available at the moment. In figure 1 the production trade off in the country is between consumer and capital goods. If the country is producing more capital goods, than consumer goods, as indicated by point A, it sacrifices producing consumer goods. However, capital goods are not only goods but also resources, therefore an increase in their production facilitates economic growth in the upcoming years, thus shifting PPF outwards, as represented in figure 1 (Hall, and Lieberman 33-34).
2. The United States has an absolute advantage in making many goods, such as short-sleeve cotton golf shirts. Why do Costa Rica and Bangladesh make these shirts and export them to the United States?
Absolute advantage implies that the United States can produce short-sleeve cotton golf shirts using fewer inputs, than Costa Rica and Bangladesh. However, the opportunity cost of producing shirts for the U.S. is much higher, since to produce shirts the U.S. would have to give up other products, such as car manufacturing, which require the same resources. The theory of comparative advantage suggests that the country with the lowest opportunity cost of producing a good should specialize in its production (Mankiw 54-56). Therefore, the U.S. imports shirts, while exporting other products. Taking advantage of trade, all countries in this case end up with more shirts and other goods.
3. Why is it that America uses heavy street cleaning machines driven by one person to clean the streets, while China and India use many people with brooms to do the same job?
Assuming that economic entities try to minimize their production cost in order to maximize revenues, it is economically efficient to choose inputs with equal marginal product (MP) per dollar. Since in India and China labour cost is lower, than in the U.S., the marginal product per dollar of labour in the U.S. is higher. Therefore, in the U.S. high-MP-per dollar (labour) is reduced, while the low-MP-per dollar input is increased (machinery), until they equalize at the level of 1 machine and 1 person. In India and China labour is a low-MP-per dollar input, therefore it is increased, minimizing the usage of high-MP-per dollar machinery (Samuelson 167-168).
References
Hall, Robert Ernest, and Marc Lieberman. Microeconomics: Principles and Applications .
Mason, the United States of America: Thomson Higher Education, 2008. 33-34. Print.
Mankiw, N. Gregory. Principles of Economics. 6th ed. Mason, the United States of America:
South-Western Cengage Learning, 2009. 54-56. Print.
Samuelson, Paul Anthony. Economics. 19th ed. New York, the United States of America:
Mc-Graw-Hill, 2010. 167-168. Print.
