AQA A-level Economics: Comparative advantage and the costs and benefits of international trade (7136)

This guide covers the first part of section 4.2.6.2 Trade (3.2.6.2 on the AQA website) in the AQA A-level Economics (7136) specification, version 1.3. It teaches the model of comparative advantage, the numerical example, the benefits and costs of trade and changes in the UK pattern of trade. Tariffs, quotas, customs unions, the Single European Market and the World Trade Organisation sit in a separate unit, so they are not taught here. Every country, firm and figure below is invented and illustrative.

Course pages: AQA A-level Economics hub, checklist and free diagnostics. Companion pages: revision notes and practice questions. For economies of scale in general, see costs of production and economies of scale.

What you must be able to do

Specification content	What it means in practice
The model of comparative advantage	Explain the idea and the assumptions behind it
Comparative versus absolute advantage	Tell them apart using a table of figures
Specialisation and trade can raise total output	Use a simple numerical example to show the gain
Other benefits, such as economies of scale and increased competition	Explain each as a chain of reasoning
Costs of international trade	Explain and weigh several costs
Reasons for changes in the UK pattern of trade	Explain why who the UK trades with, and in what, shifts over time

Absolute and comparative advantage

Absolute advantage means being more productive: one country needs fewer inputs to make a good than another, or gets more output from the same inputs.

Comparative advantage means giving up less to get the good: a country holds it when the opportunity cost of the good, meaning the amount of the other good sacrificed to make one more unit, is smaller than elsewhere. It compares sacrifices, not productivity.

The two ideas can disagree. A country can have an absolute advantage in everything and still have a comparative advantage in only one good. The reason is that resources used for one good cannot be used for the other.

The numerical example, step by step

Country A and Country B make only grain and furniture, using only labour. Hours needed per unit are below. Country A has 4,800 labour hours and Country B has 8,400.

Hours per unit	Grain	Furniture
Country A	2	8
Country B	6	12

Step 1: absolute advantage. A needs fewer hours for both goods, so A has an absolute advantage in both.

Step 2: opportunity costs. In A, one furniture takes 8 hours, which could have made 8 ÷ 2 = 4 grain. So 1 furniture costs 4 grain, and 1 grain costs 2 ÷ 8 = 0.25 furniture. In B, 1 furniture costs 12 ÷ 6 = 2 grain, and 1 grain costs 6 ÷ 12 = 0.5 furniture.

Step 3: comparative advantage. Furniture is cheaper in B (2 grain against 4), so B has the comparative advantage in furniture. Grain is cheaper in A (0.25 furniture against 0.5), so A has it in grain. With only two goods, if A is cheaper at grain then B must be cheaper at furniture, so each country ends up with exactly one comparative advantage.

Step 4: output before trade. Suppose each country puts half of its hours into each good.

Before trade	Grain	Furniture
Country A (2,400 hours each)	1,200	300
Country B (4,200 hours each)	700	350
World total	1,900	650

Step 5: specialise. A puts all 4,800 hours into grain: 4,800 ÷ 2 = 2,400 grain. B puts all 8,400 hours into furniture: 8,400 ÷ 12 = 700 furniture. World output is 2,400 grain and 700 furniture, which is 500 more grain and 50 more furniture. More of both goods is available, even though A is better at both.

Step 6: trade. The price of furniture in grain must lie between the two opportunity costs, 2 and 4. Below 2, B would rather grow its own grain. Above 4, A would rather make its own furniture. Take 3 grain per furniture. B sells 320 furniture to A for 3 × 320 = 960 grain.

After trade	Grain	Furniture	Change from before
Country A	2,400 − 960 = 1,440	320	+240 grain, +20 furniture
Country B	960	700 − 320 = 380	+260 grain, +30 furniture

Both countries consume more of both goods. The gains (240 + 260 = 500 grain and 20 + 30 = 50 furniture) add up to the rise in world output. How the gain is split depends on the price agreed. A price near 2 favours A, and a price near 4 favours B.

When there is no gain

If the opportunity costs are the same, there is no comparative advantage and no gain from specialising. Suppose Country C needs 3 hours per coffee and 6 per tablet, and Country D needs 6 and 12. D has an absolute disadvantage in both, but 1 tablet costs 2 coffee in both countries. Trade changes nothing.

Assumptions, and why they matter

• Constant opportunity costs. In reality costs usually rise as a country shifts resources into one good, so full specialisation may not be sensible.
• Resources move freely between uses. Workers cannot swap from furniture to grain without retraining.
• No transport costs and no trade barriers. These eat into the gain.
• Goods are identical, and the countries have the same technology. In practice products differ and technology changes.
• Full employment, so resources are not idle.
• Only two goods and two countries. Real trade involves many.

Evaluation. The model shows the potential gain from trade, not a guaranteed one. Where the assumptions fail badly, as with large transport costs or immobile workers, the gain shrinks. The model is also static, since it uses today’s opportunity costs, and says little about how advantage changes over time.

Other benefits of trade

Economies of scale. A small bakery that sells only in its home town may produce 20,000 loaves a year. Fixed costs are 120,000 and variable costs are 4 per loaf.

• Home market only: total cost 120,000 + 4 × 20,000 = 200,000, so average cost is 200,000 ÷ 20,000 = 10.
• With exports it produces 60,000 loaves: total cost 120,000 + 4 × 60,000 = 360,000, so average cost is 360,000 ÷ 60,000 = 6.

Average cost falls by 40%, because fixed costs are spread over more units. Chain of reasoning: a larger market allows higher output, so fixed costs are spread more thinly and the firm may use specialised machinery and buy in bulk, so unit costs fall, so the firm can charge lower prices or earn more profit. This helps most where the home market is small. It is weaker where the firm is already at minimum efficient scale.

Increased competition. Imports and the chance of losing export sales put pressure on domestic firms. Chain of reasoning: more rivals mean less ability to raise prices without losing customers, so firms cut costs and improve quality, so efficiency rises and consumers get lower prices and more choice. Evaluation: it works best where competition is real and firms can adjust. Some firms will fail instead, and a few large rivals could still dominate.

Further benefits you can use briefly: wider choice for consumers, access to goods and raw materials that a country cannot produce, and the spread of ideas and technology.

The costs of international trade

Cost	Reasoning chain
Structural unemployment	A domestic industry cannot compete, so firms close and workers lose jobs. Their skills do not match vacancies elsewhere, so unemployment persists
Over-specialisation	Dependence on a single export leaves income open to price drops and demand shocks
Loss of infant industries	New domestic industries cannot match established foreign rivals, so they never develop
Environmental costs	More shipping and flights add to emissions, and low-regulation producers may attract output
Dependence on imports	Disruption abroad can cut supply of food, energy or components
Wider inequality	Gains are not shared equally: owners and highly skilled workers may gain while workers in declining industries lose

Worked example: structural unemployment. In one year 6,500 jobs are lost in industries hit by imports and 4,000 new jobs are created in export industries. The net loss is 6,500 − 4,000 = 2,500 jobs. If the labour force is 1,250,000, that is 2,500 ÷ 1,250,000 × 100 = 0.2% of the labour force. A small total can hide a large cost for the individuals and regions involved, who may not have the skills for the new jobs.

Worked example: over-specialisation. Exports are 25% of national income, and one commodity is 40% of exports. If its price falls 15% and the volume sold stays the same, the loss is 0.25 × 0.40 × 0.15 = 0.015, or 1.5% of national income.

Evaluation. Costs are usually concentrated on particular workers and regions, while benefits are spread widely as lower prices. That is why trade can be good for national income and still politically difficult. Governments can respond with retraining and regional policy.

Changes in the UK pattern of trade

The pattern of trade is what a country trades and with whom. It changes because comparative advantage changes.

Worked example: advantage reversing. Return to hours per unit in two countries, K and L, making steel and software.

Hours per unit	Steel	Software
Country K	4	8
Country L	6	9

K’s opportunity cost of 1 software is 8 ÷ 4 = 2 steel. L’s is 9 ÷ 6 = 1.5 steel. L has the comparative advantage in software, and K in steel. After K invests in training, K needs only 5 hours per software. Now K’s opportunity cost is 5 ÷ 4 = 1.25 steel, below L’s 1.5, so K has gained the comparative advantage in software. L’s cost of steel (6 ÷ 9 = 0.67 software) is now below K’s (4 ÷ 5 = 0.8), so L moves to steel. The pattern of trade reverses.

Reasons the UK pattern changes:

• Changing comparative advantage. Investment in skills, technology and capital shifts opportunity costs. The UK has moved towards services, and the share of manufacturing in its output has fallen over recent decades.
• Growth of emerging economies. Fast-growing countries become both new markets for UK exports and new low-cost sources of imports.
• Trade agreements and trading blocs. Joining or leaving a bloc changes relative prices and so who trades with whom. The UK left the European Union in 2020, which changed the terms on which it trades with its neighbours.
• Exchange rates. A fall in the pound makes exports cheaper abroad and imports dearer, which tends to shift the pattern towards exports.
• Relative costs and productivity. Faster productivity growth or lower unit labour costs abroad reduce the UK’s competitiveness in some goods.
• Tastes, incomes and technology. Rising incomes shift demand towards services, and digital technology makes more services tradable.

Evaluation. Which reason matters most varies by industry. Shifts in advantage take years, since capital and skills adjust slowly, while exchange rates and trade agreements can act faster.

Common errors

• Saying comparative advantage means “better at”. That is absolute advantage.
• Dividing the wrong way round when finding opportunity cost. The cost of good X is what you give up of Y.
• Claiming that countries with an absolute disadvantage in everything cannot gain.
• Listing costs without a chain of reasoning, or without saying who bears them.
• Quoting real statistics you cannot source. Use the figures given in the question.

Official syllabus

AQA Advanced Level GCE in Economics (7136), specification version 1.3, 29 June 2022, published by AQA: section 4.2.6.2 Trade (first part), within The international economy.