Question

A country needs to decide if it will defend itself ("guns") or feed its population ("butter"). Look at the graph. Under what conditions might a country move from Point D to Point C? If the country is at war If the country is in famine If international trade in guns is high If international demand for butter is low

Answer 1

Let's consider the graph attached, which represents the production possibilities frontier (PPF) for guns versus butter. A PPF is a curve which represents the maximum combinations of output that an economy is able to generate provided a fixed initial endownment of resources.

In this example, the economy has to decide between directing the scarce resources to either produce guns or butter.

• If the country decides to move towards point D and direct more resources to increase the production of guns (sacrificing a share of the production of butter), it might be either because they are at war, or because international trade in guns is high, which means that there is a strong demand for guns. It can also be the case the the international demand for butter is low, and as guns are the other only commodity produced by this economy, resources are removed from producing butter and can only be used for manufacturing guns instead.
• If the country decides to move towards point C and direct more resources to increase the production of butter (sacrificing a share of the production of guns), it might be because the country is in famine and needs to feed its population.