In this problem, we consider the effects of non-neutral factor growth in the small country setting. Draw a production possibilities graph, with machine tools on the vertical axis and textiles on the horizontal axis.
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Draw an international price line that is tangent to the PPF somewhere in the middle of the PPF. Label this point of tangency “A” and mark the equilibrium production levels of machine tools as y1 and of textiles as x1 on the respective axes.
Suppose the capital stock of this country grows, while the labor force remains the same. How would the PPF shift? Draw the new PPF on your graph.
Since this country is small, it is unable to influence international prices. This means that the new international price line will have the same slope as the old one. Draw the new international price line tangent to the new PPF. Label the new point of tangency “B” and mark the new equilibrium production levels of machine tools and textiles on the respective axes as y2 and x2.
What happens to production of machine tools? What happens to production of textiles? Does your graph provide evidence in favor of or against the Rybczynski theorem? Explain.
In this problem, we consider the phenomenon of immiserizing growth. Draw a concave production possibilities graph, with kazoos on the horizontal axis and euphoniums on the vertical axis. Label the PPF as “PPF1.” Suppose this country has a comparative advantage in kazoos.
Graph the following curves by clicking here
Draw an international price line that is tangent to the PPF at some point in the middle of the PPF. Label this initial production point as “E1.”
Draw an consumer indifference curve that is tangent to the PPF at some point outside the PPF. Label this initial consumption point as “C1.”
Now suppose factor-neutral economic growth occurs. Draw a new PPF, and label it as “PPF2.”
If the country is large enough, it is possible that the country’s economic growth will cause the country’s terms of trade to deteriorate so much that the country is worse off than it was before the growth. This situation is known as immiserizing growth. Depict such a situation on your graph, labeling the new production point “E2” and the new consumption point “C2.”
