Question

A country is initially in a free-trade equilibrium, in which it is producing 40 units of wheat and 64 units of cloth. The country exports cloth and imports wheat. Growth now occurs in the country’s production capabilities.If product prices are unchanged, the country will shift to producing 50 units of wheat and 80 units of cloth. What kind of growth is this?

Answer 1

Economic growth results in an outward shift of the PPF, as seen in a country's increased production capabilities for both wheat and cloth without changes in product prices, indicating more goods for consumption and trade.

Step-by-step explanation:

The growth described in the scenario where a country's production capabilities increase from producing 40 units of wheat and 64 units of cloth to 50 units of wheat and 80 units of cloth is an example of economic growth. This is a case where both production possibilities have increased, indicating an outward shift of the Production Possibilities Frontier (PPF).

Such growth typically arises from factors like technological improvements, increased labor force, or additional capital, allowing a country to produce more of both goods without the price of the products changing. This is a beneficial situation for the country, as they now have more goods available for consumption and trade, leading to potential gains from trade.