![]() Many third-world countries that have struggled with civil strife and governmental corruption have been unable to shift their production possibility curves outward, because the political instability has made it difficult for capitalism and free markets to properly function. People in these countries have little freedom and few opportunities to advance, and the incentive to work hard and innovate is minimal. These countries’ production possibilities curves have shifted out considerably because of freer markets, greater incentives to produce and innovate, and increases in capital stock.Ĭommunist (or command economy) countries, such as North Korea, Venezuela, and Cuba, have experienced far less economic growth than their capitalist counterparts. India has also become more capitalist and opened its borders to increased free international trade in the 1990s. China adopted significant free market elements primarily starting in the late 1980s, and as a result has experienced record growth. Among others, Western Economies, Taiwan, Singapore, China, Vietnam, Chile, the United Arab Emirates, South Africa, and several East bloc countries have increased their production capacities significantly during the past several decades. However, during most years, industrialized countries experience economic growth (an increase in overall production). ![]() When people become more productive (for example, by gaining skills and becoming more educated), the production possibilities curve shifts outward.Īs evidenced by the 2008/2009 recession and the recent pandemic related downturn, we don’t have economic growth all the time. Advances in human technology also stimulate economic growth. Countries that allow entrepreneurs to keep most of these rewards (by limiting taxation and limiting government involvement) have been shown to experience greater rates of technological growth. When lower costs lead to higher profits and greater rewards, entrepreneurs are motivated to continue to improve their products and production processes. Inventions and improvements take place when entrepreneurs have incentives to produce more efficiently and lower their costs. A government can encourage more production of capital goods by, for example, providing tax breaks for the production of capital goods, or by increasing taxes on the production or sale of non-capital (consumption) goods.Īdvances in technology occur because of inventions and improvements in producing goods and services. Looking at the diagram in the previous section, this is reflected by a move from a point on the curve from the lower right to the upper left (for example, from point D to point A, or from point B to point C). ![]() If a country is producing at full employment (operating on the curve), more capital goods can be produced only if the country produces fewer consumption goods. How does a country increase its capital goods, and how does it achieve advances in technology? Let’s take a look at increases in capital goods first.Ĭapital goods are produced just like other goods, such as cars or food. Therefore, economic growth is made possible by advances in technology and/or increases in resources, such as natural resources (land, oil, trees, etc.), workers, and capital goods, including machinery, equipment, assembly lines, office buildings, factories, roads, highways, and airports. ![]() For the curve to shift outward, resources (land, labor, capital, and raw materials) must increase, or we must improve the way we use these resources (technology). ![]() In the graph below, the production possibilities curve shifts outward to the right (for instance, through point F), so that the country’s production capacity level rises. Economic growth occurs when the economy realizes greater production levels. ![]()
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