Ceteris Paribus and the PPF

In economics there is a concept called the Production Possibilities Frontier (PPF). The PPF is a curved line that measures one variable against another.  It graphically represents a trade-off (increasing production of guns can only come about by decreasing production of butter, for example).

The Wikipedia illustrates the PPF with this image:

The curved line is called the Production Possibilities Frontier because the line represent a border or a limit. Any point on the graph within or on the curve can be achieved,  but no point outside of it can be achieved. In the illustrations, production points A, B, C, and D can be achieved, but point X cannot.

So how do you get more guns and more butter? The curve in the illustration and the x and y axes form a quadrant of a circle. The line from the origin, where both x and y = 0, to point D is the radius of a circle. What happens if we increase the  radius until X becomes a point on the PPF? We get more guns and more butter at any point on the curve compared to the PPF with the shorter radius, ceteris paribus.

Ceteris paribus is a Latin phrase that means “all things being held equal” in English. In this illustration it means that the shape of the curve remains a segment of a circle as the radius grows, rather than becoming a segment of an ellipse or a rectangle or some other shape. This is because all the variables that determine the shape of the curve remain the same, other than the variable that determines the radius — if ceteris parabus.

Suppose the x axis of the graph represents all the money that has been produced and is spent in the U.S. economy in a year, and the y axis represents all the money that has been produced and saved in that year (in macro economics, savings = investment). We have now accounted for all the money produced in the U.S. in that year.  This graph will have a PPF curve, possibly, but not necessarily, a segment of circle as shown in the illustration.

Moving that curve outward would be good. We would gain the potential of increasing both savings and spending. How do we move the curve outward?

Economics says that we can do it three ways. Those ways are 1) increase worker productivity, 2) trade, and 3) import workers, e.g. immigration.

This is why classical economists say that increased productivity, increased trade, and increased immigration are always good for a nation’s  economy — ceteris paribus.

I will address why expanding the PPF is not a straight forward matter in a later post.