Cambridge A Level Economics: Absolute and comparative advantage, free trade and the terms of trade (9708) – Practice Questions

These are original questions written for Marlbridge, for revision and practice on this content. They are not reproduced past-paper questions, and they do not replicate the exam’s exact structure, question count or mark tariffs – examination boards hold copyright in their own papers. Use these alongside the official past papers from your board or school.

These questions cover section 6.1 (outcomes 6.1.1 to 6.1.4) of the Cambridge International AS & A Level Economics 9708 syllabus for examination in 2026, 2027 and 2028. This is AS Level content, assumed knowledge for A Level Papers 3 and 4. All countries and figures are invented, and money is in currency units (cu). Read the study guide and the revision notes first. The course hub and checklist show the rest of the syllabus, and the free diagnostics help you pick what to practise next.

Questions

1. Define comparative advantage. [2]

2. Output per worker per week in two countries is shown below.

	Bicycles	or	Sacks of cement
Country E	20		40
Country A	10		10

(a) State which country has an absolute advantage in each good. [1] (b) Calculate the opportunity cost of one sack of cement, in bicycles, in each country. [2] (c) Identify the good in which each country has a comparative advantage and justify your answer. [3]

3. Country E has 10 workers and Country A has 20 workers, with output per worker as in question 2. Before trade each country puts half its workers into each good.

(a) Calculate total output of each good in the two countries together before trade. [2] (b) Calculate total output of each good if each country specialises fully in its comparative advantage. [2] (c) State the net gain from specialising. [1]

4. Using your answers to questions 2 and 3:

(a) State the range within which the price of one sack of cement, in bicycles, must lie for both countries to gain from trade. [2] (b) The countries agree a price of 0.8 bicycles per sack and Country E exports 125 sacks. Calculate the bicycles it receives and the final quantities of each good consumed in each country. [3]

5. Continue with the 0.8 bicycles per sack price.

(a) Calculate the most bicycles Country E could obtain if it sold all its cement. [1] (b) State the most bicycles Country E could produce with no trade. [1] (c) Explain what this shows about the trading possibility curve compared with the production possibility curve. [2]

6. Country K’s export price index and import price index are 100 in the base year. In year 1 they are 125 and 110. In year 2 they are 120 and 132.

(a) Calculate the terms of trade for both years, giving each to 1 d.p. [2] (b) Calculate the percentage change from year 1 to year 2. [1] (c) State what has happened to the terms of trade. [1]

7. Country G’s main export is ore. A rise in world supply cuts its export price index from 100 to 80, and the import price index stays at 100. Before the fall it sold 400 units at 50 cu. Demand for its ore has a price elasticity of −0.4.

(a) Calculate the new terms of trade. [1] (b) Calculate the new quantity sold and the change in export revenue. [3] (c) Explain the effect on Country G of the change in revenue. [2]

8. Explain two causes of a worsening in the terms of trade for a country that imports fuel. [4]

9. The total gain from specialisation in question 3 is 100 sacks of cement.

(a) Shipping the goods costs the equivalent of 90 sacks. Calculate the net gain. [1] (b) Calculate the net result if shipping costs the equivalent of 130 sacks. [1] (c) Explain what this shows about a limitation of the theory of comparative advantage. [2]

10. As Country H moves resources into making cloth, it gives up tea as shown.

Step	Extra cloth	Tea given up
1	20	10
2	20	15
3	20	25

(a) Calculate the tea given up per unit of cloth at each step. [2] (b) The world price is 0.8 tea per unit of cloth. Taking the three steps, how much extra cloth should Country H produce? Explain. [2] (c) State what this suggests about complete specialisation. [1]

11. Evaluate whether free trade always benefits a low-income country that depends on one primary product for most of its exports. [8]

Answers

1. The ability to produce a good at a lower opportunity cost than another country [1], meaning it gives up fewer units of other goods to make one more unit of it [1]. [2] Examiner insight: A definition that mentions only “producing more” describes absolute advantage and tends to earn little; opportunity cost needs to be named.

2. (a) Country E has an absolute advantage in both goods because it produces more of each per worker. [1] (b) Country E: 20 ÷ 40 = 0.5 bicycle per sack. [1] Country A: 10 ÷ 10 = 1 bicycle per sack. [1] (c) Cement: Country E, because 0.5 is lower than 1. [1] Bicycles: Country A. Its opportunity cost is 1 sack per bicycle against 2 sacks (40 ÷ 20) for E. [1] Each is justified by comparing opportunity costs, not output. [1] [6] Examiner insight: Answers that justify the advantage by quoting only output per worker do not show comparative advantage; the comparison of opportunity costs is the evidence.

3. (a) Country E: 5 workers make 100 bicycles and 5 make 200 sacks. Country A: 10 workers make 100 bicycles and 10 make 100 sacks. [1] Totals: 200 bicycles and 300 sacks. [1] (b) Country E makes only cement: 10 × 40 = 400 sacks. Country A makes only bicycles: 20 × 10 = 200 bicycles. [1] Totals: 200 bicycles and 400 sacks. [1] (c) 100 more sacks of cement and no fewer bicycles. [1] [5] Examiner insight: Show output for each country separately before totalling, so each step is easy to follow and an arithmetic slip is easy to spot.

4. (a) Between 0.5 bicycle per sack (Country E’s opportunity cost) [1] and 1 bicycle per sack (Country A’s opportunity cost). [1] (b) Bicycles received = 125 × 0.8 = 100. [1] Country E: 400 − 125 = 275 sacks and 100 bicycles. [1] Country A: 200 − 100 = 100 bicycles and 125 sacks. [1] [5] Examiner insight: Giving the limits as the two opportunity costs, and not as any price between the two countries’ outputs, is what makes the range correct.

5. (a) 400 × 0.8 = 320 bicycles. [1] (b) 10 × 20 = 200 bicycles. [1] (c) The TPC runs from 400 sacks to 320 bicycles and lies outside the PPC, which ends at 200 bicycles. [1] This is because the price of 0.8 bicycles per sack is better than Country E’s domestic opportunity cost of 0.5, so trade lets it consume combinations it cannot produce itself. [1] [4] Examiner insight: A diagram or description should name both axes and show the TPC and PPC sharing the cement intercept; saying only “it is bigger” is usually too thin.

6. (a) Year 1: 125 ÷ 110 × 100 = 113.6. [1] Year 2: 120 ÷ 132 × 100 = 90.9. [1] (b) (90.9 − 113.6) ÷ 113.6 × 100 = −20.0%. [1] (c) The terms of trade worsened, because each unit of exports buys fewer imports. [1] [4] Examiner insight: Keep the formula with exports on top; reversing it gives an answer that looks sensible but points the wrong way.

7. (a) 80 ÷ 100 × 100 = 80. [1] (b) The price falls 20%, so quantity rises by 0.4 × 20 = 8%, to 432 units. [1] New revenue = 432 × 40 = 17,280 cu. [1] Old revenue = 400 × 50 = 20,000 cu, so revenue falls by 2,720 cu (13.6%). [1] (c) Demand is inelastic, so the percentage rise in quantity is smaller than the percentage fall in price. [1] The country earns less to spend on imports, so it can buy fewer imports and its current account may weaken. [1] [6] Examiner insight: Quote both the old and new revenue figures; a bare “revenue falls” does not show the calculation.

8. Cause 1: a rise in the world price of fuel raises the import price index. [1] If export prices do not rise by as much, the ratio of export to import prices falls. [1] Cause 2: a depreciation of the exchange rate raises the home-currency price of imports. [1] With export prices set in home currency unchanged, the index falls. [1] Other valid causes: fall in demand for exports, a fall in export prices. [4] Examiner insight: Each cause should be tied to the two price indices; naming a cause without showing which index it moves usually leaves the chain incomplete.

9. (a) 100 − 90 = 10 sacks. [1] (b) 100 − 130 = −30, a net loss of 30 sacks. [1] (c) The theory assumes no transport costs. [1] If these costs equal or exceed the gain, specialisation and trade do not make the countries better off, so the case for free trade is weaker. [1] [4] Examiner insight: Use the numbers to show the limitation, rather than just stating that transport costs exist.

10. (a) Step 1: 10 ÷ 20 = 0.5. [1] Step 2: 15 ÷ 20 = 0.75, and step 3: 25 ÷ 20 = 1.25. [1] (b) Produce 40 more cloth (steps 1 and 2). [1] At each of those steps the opportunity cost is below the world price of 0.8 tea, while at step 3 it is 1.25, above it. [1] (c) Complete specialisation is unlikely, because rising opportunity costs erase the advantage. [1] [5] Examiner insight: Comparing each step’s cost with the world price is the reasoning that supports the stopping point.

11. Benefits: the country can specialise where its opportunity cost is lowest and import what it cannot make efficiently. [1] Export markets raise income and jobs, and imports give consumers choice and lower prices. [1] Against: primary products often face volatile prices, so the terms of trade can swing sharply. [1] If demand is inelastic, a price fall cuts revenue (as in question 7), so earnings are unstable. [1] Dependence on one export leaves little protection against shocks. [1] The theory ignores transport costs, rising opportunity costs and the case for building new industries, so the gains may be smaller than predicted. [1] Evaluation: the outcome depends on the size of the gains against the instability, how diversified the economy can become and how quickly workers can move to other industries. [1] A supported judgement, such as that trade usually benefits the country but needs diversification to be reliable, completes the answer. [1] [8] Examiner insight: Weaker answers list benefits and drawbacks side by side; stronger ones decide which matters more for this country and say what the conclusion depends on.

Where marks are usually lost

• Judging comparative advantage from output, not from opportunity cost.
• Working out opportunity cost upside down, then reaching the wrong country.
• Quoting a price outside the two opportunity costs as one that benefits both countries.
• Forgetting to show the working for each country before giving totals.
• Reversing the terms of trade formula.
• Confusing a change in index points with a percentage change.
• Stating that revenue changed without giving both figures.
• Describing limitations in general terms without linking each to the gains from trade.
• Finishing an evaluation with no judgement, or with a judgement that gives no conditions.

Next steps

• Revise with the revision notes.
• Re-read the study guide.
• Check the course hub and the checklist.
• Take one of the free 10-minute diagnostics.
• Book a free trial class.

Official syllabus

Cambridge International AS & A Level Economics 9708, syllabus for examination in 2026, 2027 and 2028, published by Cambridge University Press & Assessment (Cambridge International Education). Section 6.1, The reasons for international trade, outcomes 6.1.1 to 6.1.4.