A Decade of Building Capital
Years of choosing capital goods over consumption add to the economy's resources, shifting the frontier outward.
A Decade of Building Capital
Production PossibilitiesYears of choosing capital goods over consumption add to the economy's resources, shifting the frontier outward.
Start on the frontier
The frontier shows the maximum combinations of the two goods this economy can make when every resource is fully and efficiently used. Read Good X as capital goods, the machines, factories and transport links used to make other things, and Good Y as consumer goods. Every point on the curve is a choice about how to split today's output between the two.
Now try it yourself: shift the curves in a graded FRQ drill, or open this graph in the free sandbox.
A Decade of Building Capital, step by step
- 1
Start on the frontier
The frontier shows the maximum combinations of the two goods this economy can make when every resource is fully and efficiently used. Read Good X as capital goods, the machines, factories and transport links used to make other things, and Good Y as consumer goods. Every point on the curve is a choice about how to split today's output between the two.
- 2
The country invests
What changes in this step is the mix the country chooses, not the curve. Year after year it puts an unusually large share of its output into machinery, ports and factories rather than consumer goods. Each year some current consumption is given up, and that forgone consumption is the opportunity cost of the capital being built.
- 3
The frontier shifts outward
Those capital goods are resources in their own right, so the economy's productive capacity grows. The whole frontier shifts outward, and combinations of both goods that were unattainable before are now attainable.
- 4
The path not taken
Suppose the country had instead consumed almost all of its output year after year. It would have enjoyed more goods in the present but built far less capital, so the frontier would have grown much less. The tradeoff on a PPC is not only between two goods today. It is also between consumption today and productive capacity tomorrow.
Where it ends up
Capital goods are themselves resources, so investing in them shifts the frontier outward. The opportunity cost is the consumption given up along the way.
Now draw it yourself
Same graph, graded on whether you move the right curve and leave the rest alone.
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