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Modeling the Cold War with the PPF

We can use the PPF model to analyze an "Arms Race" between nations to understand and interpret important political events in history.
Draw a PPF for military goods and civilian goods production (similar to the traditional example of "guns versus butter"). Then draw another PPF for a country that is about twice the size of the first, but with the same degree of concavity as the PPF for the first country. Now assume that each country considers the other as a "mortal enemy," and that they engage in a costly "arms race." Each country picks a point on the PPF that produces an equal level of military output (in absolute terms).

Now answer the following questions:

What would happen if the larger country decided to increase military production? Explain your answer using the concepts of economic efficiency and opportunity costs.

What was the US strategy during the Cold War and what were the economic repercussions?

How does the potential for mass destruction influence the strategic economic balance of the United States and Russia today? Can you explain in terms of the PPF?

Solution Preview

>Draw a PPF for military goods and civilian goods production (similar to the traditional example of "guns versus butter"). Then draw another PPF for a country that is about twice the size of the first, but with the same degree of concavity as the PPF for the first country.

The attached graph shows the PPFs of a small country and a large country. The area inside the large country's PPF is twice the area inside the small country's.

>Now assume that each country considers the other as a "mortal enemy," and that they engage in a costly "arms race." Each country picks a point on the PPF that produces an equal level of military output (in absolute terms).

Suppose that both countries want to produce 60 units of military goods, . At that level of ...

Solution Summary

This solution shows how to use the Production Possibilities Frontier (PPF) to interpret the consequences of an arms race, such as the one between the United States and the Soviet Union during the Cold War.

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