"Production Possibility Frontier. It is a simplified version of a real economic situation. It represent the constraints we usually face because of limited resources, time, labour etc. This model can be shown as a graphic function.


Production Possibility Frontier
As you can see the orange graph illustrates the maximum amount of both products we are capable of producing given our available factors of production. Points A,B,C show an attainable and effective amounts. Point X shows an amount which although is attainable, but it is not effective and in fact is a waste of resources. Point Y on the other hand shows an amount which is not attainable but may be desired.



Clearly PPF applies to a wide range of goods and countries. In order to produce more of product A we must give up producing some amount of product B, this amount is called OPPORTUNITY COST. Opportunity cost determines which country has and comparative or absolute advantage in production of a certain product. ‘A country has a comparative advantage in producing a good if the opportunity cost of producing the good is lower for that country than for other countries’ (Krugman, 2008). A country has an absolute advantage if it generally excels in production of both goods given the same about of resources. This explains why American clothing corporations rather use factories and workers in distant (and often much poorer) countries. It may seem illogical, but although they have to face additional costs of transport, final result is far more effective because these distant countries have a much lower opportunity cost.

Differences in opportunity cost lead to international trade. It is obvious that i.e. European country has an absolute advantage compared to an Asian country. European countries in general are more effective in managing and using production resources. In spite of this, an Asian country will be able to produce some goods for a much cheaper price than in Europe. This allows trade between European and Asian countries. By specialization both countries will be able to consume more than if they would try to produce both products themselves.

International trade consists of purchasing goods and services from abroad (imports) and selling goods and services abroad (exports). In the past few decades imports and exports in most countries have grown rapidly, even more than individual economies of given countries. In case of international trade we use Ricardian model of international trade (Krugman, 2008), which is similar to PPF. Only Ricardian model assumes that in international trade the opportunity cost is constant therefore the PPF graph will be a straight line instead of a curve.

Situation in which a country cannot trade with other countries is called autarky. In this point a country chooses to produce some amount of product A and some amount of product B. But if a country decides to specialize in production of one product in which it has a comparative advantage and trade with other country which has a comparative advantage in production of the other product, they will both gain from the trade and they will both do better than in autarky.
The graph shows both Production Possibility Frontiers of Germany and Netherlands as well as their autarky point. As you can see, Netherlands has a comparative advantage in producing roses and Germany has a comparative advantage in production of cars. From specialization and trade, both countries will gain more than if they would produce both goods themselves."

Univesity of Aberdeen, Práce obsahuje dva grafy o rozsahu půl strany.