Norvia's Island PPF: Fish, Tourism and a Parasite
Norvia is a small island economy with a labour force of 12,000. Workers have broadly similar skills, and the economy produces only two outputs: tourism services and farmed fish, measured in thousands of standard units per year. Economists estimate these efficient combinations: (0 fish, 400 tourism), (100, 360), (200, 280), (300, 160), (400, 0). At present Norvia produces 200 fish and 240 tourism, and 8% of the labour force is unemployed. A parasite has just struck the fish stock and will cut maximum sustainable fish output by 100 units at every level of tourism. Meanwhile a foreign investor has offered to fund a fish-processing plant that would raise productivity in fish farming only. The government must choose a medium-term specialisation strategy before the next election. Advisers have been asked to weigh tourism, which earns foreign currency but is exposed to seasonal demand and travel shocks, against fish, whose world price has fallen 15% in two years.
1. Using the production possibility data, calculate the opportunity cost of each successive 100-unit increase in fish output. Explain what the pattern reveals about Norvia's resources, and state what the current production point implies.
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Calculate each move along the curve:
| Move | Fish gained | Tourism given up | Opportunity cost per unit of fish |
|---|---|---|---|
| A to B | 100 | 40 | 0.4 tourism units |
| B to C | 100 | 80 | 0.8 |
| C to D | 100 | 120 | 1.2 |
| D to E | 100 | 160 | 1.6 |
Pattern. The opportunity cost of fish rises as fish output expands. This is increasing opportunity cost, which is why the PPF is bowed out from the origin. The reason is that resources are not equally suited to both activities: coastal land, cold water and workers with fishing skills transfer to fish farming easily, but as fish output grows the economy must pull in hill land, hospitality workers and capital better suited to tourism, so each extra unit of fish costs more and more tourism.
Current point. At 200 fish the frontier permits 280 tourism, but Norvia produces only 240, so it is 40 units inside the frontier. This is productive inefficiency, consistent with 8% unemployment. Points beyond the frontier are unattainable with current resources and technology.
Implication. Some output can be gained at zero opportunity cost by putting idle labour to work; the genuine trade-off between fish and tourism only begins once the economy reaches the frontier. A strong answer distinguishes movement towards the frontier (using idle capacity) from movement along it (reallocation), and notes that the figures show physical possibilities only, not values, so they cannot by themselves decide which combination is best.
2. Explain how the parasite and the processing plant would each affect Norvia's PPF, and distinguish both from the effect of eliminating the 8% unemployment.
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Parasite. Fish capacity falls by 100 units at every tourism level, so the fish intercept falls from 400 to 300 and the curve pivots inward on the fish axis; the tourism intercept (400 tourism, 0 fish) is unchanged. The new combinations are approximately (0, 400), (100, 260), (200, 180), (300, 60). The frontier has shrunk, so previously attainable combinations such as (300, 160) are no longer feasible. The opportunity cost of tourism in terms of fish forgone falls (fish are scarcer, so each fish given up releases less tourism), which shifts the incentive towards tourism.
Processing plant. This raises productivity in fish farming only, so it rotates the frontier outward on the fish axis: the maximum fish output rises while the tourism intercept stays put, and the opportunity cost of tourism falls because each unit of tourism sacrificed now yields more fish. Note the plant changes capacity, so it is a genuine outward shift.
Eliminating unemployment. Moving from 240 to 280 tourism at 200 fish is a move from inside the frontier onto it, not a shift. Capacity is unchanged; actual output rises because existing capital and labour are used more fully. This requires sufficient aggregate demand and matching skills, not new technology.
Key distinction to state. Only the parasite (inward pivot) and the plant (outward rotation) change the PPF itself. Reducing unemployment changes the economy's position relative to an unchanged frontier and is therefore a short-run, reversible gain, whereas the other two alter the long-run trade-off permanently.
3. Recommend, with justification, whether Norvia should specialise towards tourism or fish.
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Case for fish. Fish has a lower opportunity cost at low output (0.4 tourism units per fish at the first 100 units) and the processing plant would raise productivity and value added, creating skilled jobs and backward linkages. If the plant raises export value per unit, the falling world price of unprocessed fish matters less.
Case against fish specialisation. The parasite cuts fish capacity by 100 units at every tourism level, shrinking exactly the axis on which specialisation would concentrate; world fish prices are already down 15%, so revenue could fall even with higher volumes; and concentrating in one primary product exposes Norvia to volatile terms of trade.
Case for tourism. Tourism earns foreign currency, uses the island's natural endowment, and has a rising income elasticity of demand in richer markets. But it is seasonal and vulnerable to travel shocks, and requires infrastructure and skills Norvia may not have.
Judgement. The PPF shows what is physically possible, not what is worth producing; with increasing opportunity costs, extreme specialisation is rarely optimal. The strongest answer recommends a diversified strategy: invest in the processing plant (which shifts the frontier out and raises value added) while maintaining and marketing tourism, rather than choosing one extreme. Justification rests on risk: two moderately sized, imperfectly correlated export sectors stabilise foreign earnings, whereas a single sector transmits external shocks directly to national income. Conditions should be stated: the plant is worth funding only if the fish stock recovers; tourism expansion should target several source markets to limit exposure to one country's travel cycle; and with 8% unemployment, Norvia can expand both activities initially by moving onto the frontier before the trade-off binds. A recommendation that ignores the parasite's capacity loss, or that treats the PPF as a value measure, is incomplete.