If significant unemployment exists in an economy, where will actual production be located relative to the production possibilities frontier (PPF)?

Introduction / Context:
This question tests your understanding of how the production possibilities frontier (PPF) represents efficiency, full employment, and opportunity cost in an economy. The PPF is a fundamental tool in basic economics. It shows the maximum combinations of two goods that can be produced when resources are fully and efficiently utilised. When there is unemployment or underutilisation of resources, actual production lies at a different position relative to this frontier.

Given Data / Assumptions:

• The economy produces two broad categories of goods represented on the axes of a PPF diagram.
• The PPF shows combinations that are feasible with existing resources and technology when they are fully employed and used efficiently.
• We are told there is unemployment, meaning that some labour and possibly other resources are not being used.
• We need to identify the location of actual production in this situation.

Concept / Approach:
Points on the PPF represent efficient production with full employment of resources. Points outside the PPF are unattainable with the current resource base and technology. Points inside the PPF represent feasible but inefficient production, where some resources are idle or misallocated. Unemployment implies that labour is not fully used, so the economy is capable of producing more of one or both goods without sacrificing existing output. This situation corresponds to a point inside the PPF, not on or outside it.

Step-by-Step Solution:
Step 1: Visualise a standard bowed out PPF with two goods on the axes.Step 2: Recall that every point on the PPF uses all available resources efficiently, implying full employment.Step 3: If there is unemployment, some resources, especially labour, are idle, so the economy operates below its potential.Step 4: This means the actual combination of output must lie inside the frontier, where it is physically possible but not efficient.Step 5: Points outside the PPF require more resources or better technology than the economy currently has, which is not the case merely because there is unemployment.Step 6: Therefore, unemployment causes the economy to produce at a point inside its production possibilities frontier.

Verification / Alternative check:
Imagine that an economy has enough workers and machines to produce either 100 units of good A or 100 units of good B or some combination on the PPF. If many workers lose jobs due to a recession, the economy might produce only 70 units of A and 20 of B, even though it could produce more with available resources. This combination appears inside the PPF. If employment fully recovers, output can move back to a point on the frontier. At no stage can the economy reach a point outside the frontier unless resources increase or technology improves, which is a different scenario from cyclical unemployment.

Why Other Options Are Wrong:
Option A, production outside the PPF, is impossible with existing resources and technology. Option C describes full efficiency and full employment, which contradicts the assumption of unemployment. Option D claims production is both on and outside the PPF, which is logically impossible. Option E, production at the origin, would represent zero output of both goods and is an extreme case that would require all resources to be idle, not simply significant unemployment as described here.

Common Pitfalls:
A common confusion is to think that unemployment pushes the PPF inward. In fact, the frontier itself represents potential output and does not shift due only to cyclical unemployment; it shifts when resources or technology change. Unemployment simply means the economy is operating at a point inside the existing PPF. Remember also that movement from inside the frontier to a point on the frontier reflects better utilisation of existing resources, while movement of the frontier outward reflects long run growth in capacity.

Final Answer:
With significant unemployment, an economy will produce inside its production possibilities frontier at a point representing underutilisation of resources.