King Rat (gkr) wrote,
King Rat

A peace dividend

I'll only be answering the last part of this question directly.

Imagine a society that produces military goods and consumer goods, which we'll call guns and butter.

  1. Draw a production possibilities frontier for guns and butter. Explain why if most likely has a bowed-out shape.
  2. Show a point that is impossible for the economy to achieve. Show a point that is feasible but inefficient.
  3. Imagine that the society has two political parties, called the Hawks (who want a strong military) and the Doves (who want a smaller military). Show a point on your production possibilities frontier that the Hawks might choose and a point the Doves might choose.
  4. Imagine that an aggressive neighboring country reduces the size of its military. As a result, both the Hawks and the Doves reduce their desired production of guns by the same amount. Which party would get the bigger peace dividend, measured by the increase in butter production? Explain.

The graph is bowed outward because of specialization. Some people and resources are best suited toward producing guns, some toward butter. If the folks who are better at making butter are instead making guns, they will be making fewer guns per person (or per resource). Their productivity on the production of guns will be much less. Moving on to the last part, the amount of butter the Doves will be producing in this economy will likely be using all the people who are best at making butter. So reducing the number of guns produced means that people who are better suited to making guns will now be making butter. But less of it per person than those already making butter. On the other hand, the Hawks will likely have some folks better suited to making butter making guns. So long as they allocate the right people, if they reduce gun production by the same amount as in the Dove scenario, they will be moving people who are more productive at butter production (compared to the Doves allocation at least) to butter production. So they'll get more butter in exchange for the guns given up. However, there will be a lot of leftover guns.

Tags: macroeconomics

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