PPF Inward Shift - Theme 1 Micro

For most countries, the production possibility frontier (PPF) will shift outwards over time reflecting an increase in potential output of goods and services. But for others, there are risks that long-term growth can be damaged. One example is the consequences of de-population which leads to a shrinking active labour force.

De-population can occur naturally when the birth rate falls and is seen most often in nations with a high median age – an example being Japan which has a very low birth rate and a low rate of net inward migration. A number of Eastern European countries are experiencing population decline including Bulgaria, Romania and Ukraine. Another cause is a brain drain effect from (often) younger workers leaving a country suffering from high unemployment to find better paid work elsewhere (an example being Greece) or to escape a dire economic and social crisis such as being experienced in Venezuela at present. A brain drain is also known as human capital flight.

The extent to which de-population affects the position of the PPF depends on the scale of the population decline. In the case of Latvia for example, the resident population is shrinking by more than 1 per cent a year. It also depends on the quality of the people who leave – for example the large exodus of skilled surgeons, teachers and engineers from countries such as Ethiopia or Kenya in part because of social and political unrest, even though both countries are still growing quite quickly. Investment in labour-saving capital technologies might help to offset the loss of labour, but new plant and machinery also requires sufficient training to use it well.

A second cause of an inward shift of the PPF can be a decline in both the stock and the quality of a nation’s natural resources. Many economists are now worried that the world as a whole is extracting natural inputs far too quickly for economic growth and living standards to be sustained.

Resource depletion is the consumption of a resource faster than it can be replenished. The economist Kate Raworth in “Doughnut Economics” argues against the old industrial model of extract – make – use – dispose - which – she believes has “depleted nature’s resources and has dumped too much waste in her sinks.” Natural resource depletion can be seen in many countries – from deforestation in Brazil to the decline in fish stocks in the east of sub Saharan Africa. Using up natural resources contributes to short term economic growth but damages long-run productive potential especially if countries are unable to harness natural resource wealth and use it to finance investment in human capital.

Declining soil fertility, collapsing bio-diversity, the effects of over-fishing and deforestation and the scourge of plastic pollution are some of the biggest issues of our time. That said, there is an argument that resource scarcity will act as a stronger incentive for scientists and entrepreneurs to innovate to find technologies that promote clean energy and sustainable farming. Governments can also intervene in markets for example through pricing carbon emissions to help reduce the risks of catastrophic climate change. The aim of such policies is to help protect renewable resources—agricultural land and forests and protected marine areas—so that they can produce benefits across generations.