An economy’s capacity to produce goods and services depends on its endowment of resources and the productivity of those resources. The two-person, two-product examples in the previous section reflect this.
The productivity of labour, defined as output per worker or per hour, depends on:
- Skill, knowledge and experience of the labour force;
- Capital stock: buildings, machinery, and equipment, and software the labour force has to work with; and
- Current technological trends in the labour force and the capital stock.
The productivity of labour is the output of goods
and services per worker.
An economy’s capital stock is the buildings,
machinery, equipment and software used in producing goods and services.
The economy’s output, which we define by Y, can be defined as the output per worker times the number of workers; hence, we can write:
Y = (number of workers employed)X(output per worker):
When the employment of labour corresponds to ‘full employment’ in the sense that everyone willing to work at current wage rates and normal hours of work is working, the economy’s actual output is also its capacity output Yc. We also term this capacity output as full employment output:
Full employment output Yc = (number of workers at
full employment) X (output per worker).
Suppose the economy is operating with full employment of resources producing outputs of two types: goods and services. In Figure 1.5, PPFo shows the different combinations of goods and services that the economy could produce in a particular year using all its labour, capital and the best technology available at the time.
An aggregate economy produces a large variety of outputs in two broad categories. Goods are the products of the agriculture, forestry, mining, manufacturing and construction industries. Services are provided by the wholesale and retail trade, transportation, hospitality, finance, health care, legal and other service sectors. As in the two-product examples used earlier, the shape of the PPF illustrates the opportunity cost of increasing the output of either product type.
Point 
on 
shows one possible structure of capacity output. This combination may reflect the pattern
of demand and hence expenditures in this economy. Output structures differ among economies with different income levels. High-income economies spend more on services than goods and produce
higher ratios of services to goods. Middle income countries produce lower ratios of services to goods, and low income countries much lower ratios of services to goods. Different countries also
have different PPFs and different output structures, depending on their labour forces, labour productivity and expenditure patterns.
- 1175 reads
