Confronting Scarcity: Choices In Production

Read this chapter to learn about the factors of production and the way they are combined in production. Use the production possibilities curve to represent the alternative combinations of goods and services that an economy can produce. Make sure to understand how the curve represents efficient, inefficient, and unattainable levels of production. Pay attention to how economic growth can be represented by shifts in the curve. Also in this chapter, learn about how economic systems compare.

3. Applications of the Production Possibilities Model

Case in Point: The Prospects for World Economic Growth

What will happen to world economic growth in the next 10 years? The prognosis, according to economists Dale W. Jorgenson of Harvard University and Khuong M. Vu of the National University of Singapore, suggests that world growth is likely to be somewhat slower in the next decade than it was in the last.

The two economists, who have written extensively on the problem of estimating world economic growth, estimate that the world economy (based on their sample of 122 countries that account for 95% of world GDP) grew at a rate of just 2.20% from 1990–1995. That increased to 3.37% per year from 1995–2000. During the period from 2000–2005 the annual growth rate accelerated again to 3.71%. Despite the recession and financial crisis that began in 2008, world growth slowed a bit but was still 3.06% from 2005 to 2009. Growth at 3% would double world economic income every 24 years. Think for a moment about what that implies - world income would quadruple in just 48 years. Growth at the 1990–1995 pace of 2.20% per year would take 33 years for income to double.

Might the world growth rates from 2000 to 2009 of above 3% be repeated during the next 10 years? Under their base-case scenario, the economists project the world growth rate between 2010 and 2020 to be about 3.37%.

What do they think the economic world will look like then? They predict that over the next 10-year period: the U.S. growth rate will slow down compared to the last two decades, primarily due to slower growth in labor quality, but the U.S. growth rate will still lead among the G7 countries (a group of seven large industrialized countries that includes Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States); the overall growth in the G7 countries will continue to decline; and growth in the developing countries of Asia (Bangladesh Cambodia, China, Hong Kong, India, Indonesia, Malaysia, Nepal, Pakistan, Philippines, Singapore, South Korean, Sri Lanka, Taiwan, Thailand, and Vietnam) will slow a bit from the recent past but will be high enough that those countries' GDPs will comprise nearly 37% of world GDP in 2020, as compared to 29% in 2010. In terms of size of GDP in 2020, they predict the following new order: China, the United States, India, Japan, Russia, Germany, and Brazil. If their predictions are realized, it will mark the end of a period of more than a century in which the United States has been the world's largest economy.