The production possibilities of a country are illustrated as the potential production capacity for a country with a given set of technology and resources. In this view, a decrease in taxes is likely to increase the production possibility of a nation in the short-run ( Cullis et al. 2009 ). The reduction in taxes encourages investments which enhances allocation of more resources to the production of the consumer goods.
However, an increase in government regulations negatively affects the production possibilities. In the short-run it reduces these possibilities since the amount of investment reduces. More regulations discourage business; thus, it may decrease the amount of the foreign direct investment injected into the economy. Besides, the local investors may invest more on the capital goods reducing the allocation to consumer goods ( Mankiw, 2014 ). As a result, the nation’s production capacity decreases.
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Increased military spending also decreases the production possibilities. The classical school believes that high military expenditure results in a retarded economic growth due to lower levels of domestic savings and private investment ( Korkmaz, 2015 ). Besides, it causes a reduction in the consumption levels due to decreased aggregate demand. As a result, there are low production possibilities in the long-run.
Increased college tuition also affects the production possibilities as it reduces the number of competent human resources in the market. For instance, high cost of tuition may lock out good students from the poor families. Hence, there are fewer engineers, scientists, and other professionals who could stir production. Besides, these students will not join the economy, consequently reducing the aggregate demand. As a result, fewer goods are produced to equate the demand.
A faster and more powerful chip increases the production possibilities. A newer and better tech leads to an out world shift in the curve. It means that the economy experiences increased production of goods with the same level of resources. Besides, it reduces the cost of production resulting in high investment in the production of consumer goods ( Mankiw, 2014 ). Therefore, the production possibility of a nation is directly affected by new technologies.
References
Cullis, J., Jones, P., & Jones, P. R. (2009). Public finance and public choice: analytical perspectives . Oxford University Press.
Korkmaz, S. (2015). The effect of military spending on economic growth and unemployment in Mediterranean countries. International Journal of Economics and Financial Issues , 5 (1), 273-280.
Mankiw, N. G. (2014). Principles of macroeconomics . Cengage Learning.
