In the small country of Fictionia, there are 30 workers. Each worker can produce 4 shirts in one day, or bake 2 loaves of bread. These are the only two goods the can be produced.
(a) Draw the consumption possibility frontier (CPF) for Fictionia, showing the combinations of shirts (S) and bread (B) that can be feasibly consumed in a day. Put shirts on the vertical axis. Label both intercepts, and label the curve as “CPF 1”.
(b) Fictionia begins to trade with the rest of the world. The rest of the world uses World Dollars as currency. A shirt is worth $2, and a loaf of bread is worth $3.
To buy a shirt, a person in the rest of the world can sell bread for World Dollars, and use the World Dollars to buy a shirt. In the rest of the world, what is the opportunity cost of a shirt? (units are loaves of bread)
(c) State and explain briefly which good Fictionia should export, if it trades with the rest of the world.
(d) Draw Fictionia’s CPF if it trades with the rest of the world. Label both intercepts, and label the curve as “CPF 2”. Mark and label a point (A) on the diagram that represents Fictionia’s production.
(e) Fictionia’s population is aging, so the number of workers begins to fall. Draw and label “CPF 3” which shows the possible impact of this change on consumption possibilities. Fictionia is still trading with the rest of the world, and nothing else about the economy has changed.
Introduction: Fictionia, a small country with 30 workers, produces two goods: shirts (S) and bread (B). Each worker can produce 4 shirts in a day or bake 2 loaves of bread. This essay will explore Fictionia’s consumption possibility frontier (CPF) before and after trade, its optimal exports, and the effects of a changing workforce.
The Consumption Possibility Frontier (CPF) in Autarky: In a closed economy (autarky), Fictionia’s CPF illustrates the combinations of shirts and bread that can be feasibly consumed in a day. The CPF is as follows:
[Insert Diagram – CPF 1]
The vertical axis represents shirts, and the horizontal axis represents bread. The intercepts represent the maximum production of each good. Fictionia can produce 120 shirts (30 workers x 4 shirts) or 60 loaves of bread (30 workers x 2 loaves).
Opportunity Cost of a Shirt: When Fictionia starts trading with the rest of the world using World Dollars ($), it becomes essential to understand the opportunity cost of a shirt for the rest of the world. A shirt is worth $2, while a loaf of bread is worth $3. To calculate the opportunity cost of a shirt, we can use the formula:
Opportunity Cost of a Shirt = (Price of Bread) / (Price of Shirt) Opportunity Cost of a Shirt = $3 / $2 = 1.5 loaves of bread
Hence, in the rest of the world, the opportunity cost of a shirt is 1.5 loaves of bread.
Optimal Exports for Fictionia: Fictionia should export the good with the lower opportunity cost, which is shirts in this case. By exporting shirts, Fictionia can acquire more World Dollars for each shirt sold and then use those World Dollars to import bread. This strategy allows Fictionia to maximize its consumption possibilities and benefit from specialization.
The CPF After Trade: After engaging in trade with the rest of the world, Fictionia’s CPF shifts outward due to specialization and trade. Here is the updated CPF:
[Insert Diagram – CPF 2]
This new CPF reflects increased consumption possibilities as Fictionia can now import bread more efficiently using World Dollars obtained from shirt exports. Point A on the diagram represents Fictionia’s production point, which now falls on a higher level of the CPF, indicating increased well-being.
Impact of a Changing Workforce (Aging Population): If Fictionia’s workforce begins to decline due to an aging population, its CPF will contract. The reduced number of workers will result in lower maximum production capacity for both shirts and bread. Here is the new CPF (CPF 3):
[Insert Diagram – CPF 3]
As shown in CPF 3, the declining workforce leads to reduced maximum production levels for both goods, impacting Fictionia’s consumption possibilities negatively. However, trade with the rest of the world remains unchanged, allowing Fictionia to make the most of its available resources.
In conclusion, Fictionia’s engagement in international trade by exporting shirts, its understanding of opportunity costs, and its adaptation to changes in the workforce demonstrate the country’s ability to improve its consumption possibilities and overall economic well-being. Trade enables countries to maximize their efficiency and optimize their production and consumption patterns, ultimately benefiting the welfare of their citizens.
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