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1.3.1

1.3 Comparative Advantage and Gains from Trade — Practice

Unit 1 · Basic Economic Concepts

1.3 Practice  Comparative Advantage and Gains from Trade

Guiding question

Given a fresh two-country table, can you correctly separate absolute advantage from comparative advantage — and calculate a real terms-of-trade range?

How the real paper is built

The ministry sets half multiple choice and half written answer in every subject. The two halves are not the same skill. In the multiple-choice half you have to spot the wrong options quickly — and the wrong options are built out of the mistakes students really make. In the written half nobody gives you the answer to recognise; you have to produce it, in your own words, with a reason.

Practise both. Being good at one half and weak at the other costs you exactly half the paper.

1
Country A can produce a maximum of 80 units of grain or 40 units of steel. Country B can produce a maximum of 30 units of grain or 30 units of steel. Which country has the comparative advantage in steel?
2
Using the same data as Question 1 (A: 80 grain or 40 steel; B: 30 grain or 30 steel), which country should specialize in grain?
3
Two countries' opportunity costs of producing 1 unit of cloth are: Country M = 3 units of grain, Country N = 5 units of grain. Which of the following terms of trade (price of 1 cloth, in grain) would benefit BOTH countries?
4
A country with no absolute advantage in any good compared to its trading partner —
Level 2 · explain why
1(a)
The country of Palmira can produce a maximum of 90 units of rice or 30 units of furniture. The country of Sundale can produce a maximum of 50 units of rice or 50 units of furniture. Calculate each country's opportunity cost of producing 1 unit of furniture, and identify which country has the comparative advantage in furniture. Show your work.
[4 marks]
Level 3 · weigh it up and decide
1(b)
Using the same data as part (a), identify the range of mutually beneficial terms of trade for 1 unit of furniture, in units of rice. Then, assuming Palmira specializes fully in rice and Sundale specializes fully in furniture, explain why a trade at a rate within that range leaves both countries able to consume a combination of rice and furniture that neither could have produced on its own.
[5 marks]

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