Micro Foundations · intro
What moves on the Absolute vs. Comparative Advantage diagram
A negative productivity shock contracts the home production possibility frontier, reducing attainable output combinations and altering the opportunity costopportunity costWhat you give up to get something, the value of the next-best alternative you didn't choose. that drives specialisation.
Each frontier shows the maximum combinations a country can produce with its resources.
A multi-year drought devastates the home country's agricultural capacity.
The home frontier pulls inward: every combination that was possible before is now out of reach.
Watch the slope as well as the position. The slope is opportunity costopportunity costWhat you give up to get something, the value of the next-best alternative you didn't choose., and it decides which good this country should specialise in.
Examiners ask this as: drought, home production falls, ppf shrinks, crop failure, lower output.
Other scenarios on Absolute vs. Comparative Advantage