PPFs and unemployment

Production possibility frontiers (PPFs) - which show all the possible combinations of two goods an economy can produce from its resources - can be used to illustrate unemployment in an economy.

PPFs

All points on a PPF, including 'a', 'b' and 'c' in the diagram below are equally efficient and attainable given that they use all the available scarce recourses. However, point ‘d’ is not currently attainable as it lies outside the existing PPF.  Though point 'd' is unattainable it may be an objective for the future.

In contrast, point ‘e’ is attainable, but inefficient as more could be produced of both goods. It is possible to have X2, and 3 more units of Y (at Y9), and to have Y6, and 1 more of X (at X3).

PPFs and unemployment

Point 'e' also illustrates the idea of Pareto efficiency, as more of X and Y can be achieved without any sacrifice. Hence, point ‘e’ both inefficient and implies that there are unemployed resources in the economy. 

PPFs can be used to illustrated the under-utilisation of capital as well as unemployment of labour. Point 'e' also equates to the idea of a negative output gap.

While PPFs are useful in terms of illustrating the idea of unemployment, they do not help distinguish the cause of unemployment. The diagram does not indicate whether unemployment is caused by a lack of demand (demand deficient unemployment) or from structural factors in the economy.

Movements in the position of point 'e' can also illustrate whether the level of unemployment is changing

Read more on unemployment.

Video on PPFs and unemployment
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