Micro Foundations · intermediate
What moves on the Absolute vs. Comparative Advantage diagram
Rapid foreign productivity growth expands the partner's production possibility frontier; gains from trade persist provided relative opportunity costs still differ between countries.
Comparative advantagecomparative advantageBeing able to produce something at a lower opportunity cost than others, the true basis for trade. is about relative opportunity costs, so what happens abroad matters at home.
The trading partner industrialises rapidly, lifting productivity across its economy.
The foreign frontier expands outward substantially.
Absolute advantage may now sit abroad in both goods, but gains from trade survive as long as the opportunity costs still differ. That is the whole insight of Ricardo.
Examiners ask this as: industrialisation, foreign growth, partner catches up, ppf expands abroad, china growth.
Other scenarios on Absolute vs. Comparative Advantage