What can we learn from a country's production possibilities curve?
There are two main things that we can learn from a country’s production possibilities curve (PPC). We can learn what its economic potential is and we can learn how close it is to its economic potential.
A PPC is an extremely simplified portrayal of a country’s economy. It shows what combinations of two types of goods are possible in that economy. For a country as a whole, it might show the different combinations of consumer goods and capital goods the country could produce.
This means that the PPC can show us how much total output a country’s economy can produce. That value is shows by the curve of the PPC. If we know how much the country is producing, we can also determine how close it is to reaching its potential. This is because the curve of the PPC is the country’s potential. If we know how much of each type of good the country is actually producing, we can determine how far that value is from the maximum possible combination, as shown by the curve of the PPC. The farther from the curve the country’s economy is, the less efficient it is.