Production Possibilities Frontiers Topic Index

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Current Account

The largest component of the current account balance is the balance of trade. Specialization and trade based on the law of comparative advantage creates a gain from trade that can be illustrated as an outward shift in a production possibilities frontier.

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Labor Productivity

Gains in labor productivity cause the production possibilities frontier (PPF) to shift outward. To see this, recall that the PPF represents the combinations of various goods and services than an economy can produce when all existing inputs (land, labor, capital) are used efficiently. When labor productivity increases, a larger quantity of goods and services can be produced with the existing set of inputs.

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Real GDP

An economy is operating on its production possibilities frontier (PPF) when it is using all of its resources (land, labor, and capital) efficiently. An economy is operating inside its PPF during a recession when some of these resources are idle. Economic growth is represented as outward movement on a PPF diagram. For example, business investment that creates more capital can lead to economic growth and an outward shift in the PPF.

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