If The Gdp Of Our Economy Is 110, And Full Employment Is 100, Where Is It On The Ppc?
PPC June 30th, 2009What point in the cycle is the economy at and why?
Also, where is the economy on the production possibilities curve? We think its outside of the curve but we’re not sure.
HELP =)
June 30th, 2009 at 10:14 pm
Nominal GDP would be outside of the PPC, but real GDP would be either at the PPC or below it.
The reason why GDP is above PPC is inflation. You have to count Real GDP rather than nominal.
If this is the case (GDP of our economy is 110, and full employment is 100), then, in the business cycle we have an expansion and at the same time we have an inflation.
I hope this helps
June 30th, 2009 at 10:14 pm
It depends on what assumptions you draw PPC. If you take technology and capital fixed but labor-force took at really full employment – then it possible that economy is out from PPC.
Some reasons could be: labor was temporary working more working hours, capital growth, technological development, etc.
Usually in PPC is taken natural rate of unemployment, but there is cyclical fluctuations (business cycles) then labor works above capacity (in a short-run).
So if your economy is outside of PPC – it’s not a problem but question of assumptions, production factor growth, temporary boost or really some errors in measurements.
June 30th, 2009 at 10:14 pm
Outside the PPC and in a period of inflation. If you’re producing more than you expected (as shown by the GDP higher than full employment), you will be outside of the curve.