Micro Foundations · intermediate
What moves on the Absolute vs. Comparative Advantage diagram
A destructive shock abroad contracts the foreign production possibility frontier, reducing world output and worsening the home country's terms of tradeterms of tradeThe rate at which exports exchange for imports..
Both frontiers together determine what the trading pair can consume between them.
Conflict destroys infrastructure and displaces workers in the partner economy.
The foreign frontier contracts inward.
The home country now faces scarcer imports and worse terms of tradeterms of tradeThe rate at which exports exchange for imports.. This is how a shock in one economy travels to another through trade links.
Examiners ask this as: war, conflict, foreign production falls, ppf contracts, supply disruption abroad.
Other scenarios on Absolute vs. Comparative Advantage