Pearson Edexcel International Advanced Level Economics: Comparative advantage (YEC11) – 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 statements 1 to 3 of 4.3.2 Trade and the global economy in the Pearson Edexcel International Advanced Subsidiary/Advanced Level Economics specification (Issue 2, June 2018). Unit 4 is an International A2 unit that the specification marks as IAL compulsory. All countries and figures are invented and illustrative. Study first with the study guide and revision notes. Hub: Edexcel A Level Economics. Checklist: printable checklist. Diagnostic: free diagnostics.

Questions

1. (a) Define comparative advantage. [2] (b) State two assumptions of the theory of comparative advantage. [2]

2. Hours needed to make one unit (Countries M and N):

	Coffee	Tablets
M	2	3
N	8	6

(a) Calculate the opportunity cost of one tablet, in coffee, in each country. [2] (b) Identify which country has an absolute advantage, and which has a comparative advantage in tablets. [2] (c) State the range of exchange ratios (coffee per tablet) at which both countries gain. [2]

3. M has 600 hours and N has 1,200. Before trade each country splits its hours equally between the two goods. (a) Calculate world output of each good before trade. [3] (b) Calculate world output after complete specialisation, and the gain. [2] (c) N then sells 100 tablets to M for 120 coffee. Calculate each country’s consumption and show that both gain. [2]

4. Explain two limitations of the theory of comparative advantage. [6]

5. Explain how rapid productivity growth in an emerging economy could change its comparative advantage and its pattern of trade. [6]

6. Country E’s exports rise from 450 to 1,260 over eight years. World exports rise from 15,000 to 21,000. (a) Calculate E’s share of world exports in each year. [2] (b) Calculate the percentage growth of E’s exports and of world exports. [2] (c) Explain one reason why a bilateral trade agreement could raise trade between E and a neighbour. [2]

7. An exporter in Country A sells 3,000 units a year at 600 A-units each. The exchange rate rises from 0.40 to 0.46 foreign units per A-unit. Price elasticity of demand for the good is −1.2. (a) Calculate the foreign-currency price before and after, and its percentage change. [2] (b) Calculate the percentage change in quantity demanded. [1] (c) Calculate the change in foreign-currency revenue. [2]

8. Country A, base year = 100 for both indices. Year 2: export prices 118, import prices 104. Year 3: export prices 118, import prices 131. (a) Calculate the terms of trade for years 2 and 3. [2] (b) Calculate the percentage change between years 2 and 3. [2] (c) Interpret the result. [1]

9. In Country J wages rise 9% and output per worker rises 4%. J’s inflation is 7% and its trading partners’ is 3%. (a) Find the percentage change in unit labour cost. [2] (b) Explain the likely effect on J’s export prices, terms of trade and competitiveness. [2] (c) Calculate J’s relative price rise against its partners. [2]

10. An exporter sells 2,500 units at 40 (revenue 100,000). Its price rises 8%. (a) Calculate the new revenue if price elasticity of demand is −0.6. [3] (b) Calculate the new revenue if it is −2.1. [2]

11. Country H exports 4,000 and imports 3,800 (a surplus of 200). Import prices rise 15%. Export prices are unchanged. Price elasticity of demand for imports is −0.3. (a) Calculate the terms of trade index, taking the starting value as 100. [1] (b) Calculate the new import bill and trade balance. [3] (c) Evaluate whether a deterioration in the terms of trade necessarily lowers living standards and worsens the balance of trade. [6]

Answers

1. (a) Giving up less of other goods to make a good than another country gives up [1], so its opportunity cost is lower [1]. (b) Any two: constant opportunity costs; no transport costs; no trade barriers; two countries and goods; factors mobile within a country [1] [1]. [4] Examiner insight: A definition that mentions opportunity cost explicitly is stronger than one that says “better at making”. Assumptions should be named precisely, not listed as “perfect conditions”.

2. (a) M: 3 ÷ 2 = 1.5 coffee [1]. N: 6 ÷ 8 = 0.75 coffee [1]. (b) M has the absolute advantage in both goods (fewer hours) [1]. N has the comparative advantage in tablets because 0.75 is below 1.5 [1]. (c) Between 0.75 and 1.5 coffee per tablet [1] [1]. [6] Examiner insight: Absolute advantage compares hours; comparative advantage compares opportunity costs. Giving both countries’ costs next to each other makes the comparison visible.

3. (a) M: 300 hours ÷ 2 = 150 coffee and 300 ÷ 3 = 100 tablets [1]. N: 600 ÷ 8 = 75 coffee and 600 ÷ 6 = 100 tablets [1]. World: 225 coffee and 200 tablets [1]. (b) M makes 600 ÷ 2 = 300 coffee; N makes 1,200 ÷ 6 = 200 tablets [1]. Gain: 75 coffee and no loss of tablets [1]. (c) N consumes 100 tablets and 120 coffee (45 more coffee) [1]. M consumes 180 coffee and 100 tablets (30 more coffee) [1]. [7] Examiner insight: Show the before and after totals side by side so the gain is visible. Stating who gains and by how much in each country is stronger than stating only the world gain.

4. First: opportunity costs rise as a country specialises [1], so the gain stops before complete specialisation [1], and benefits shrink [1]. Second: transport costs and trade barriers add to the cost of imports [1], so the price at which trade pays narrows or disappears [1], and a country may be better off producing at home [1]. (Other valid limitations: factors immobile, so unemployment; static model; unequal gains.) [6] Examiner insight: Naming a limitation scores less than explaining what it does to the gain. Check that your two limitations are different, not one idea in two forms.

5. Investment and skills raise output per worker [1], which lowers unit costs and opportunity costs in those sectors [1]. Advantage shifts from low-skill or primary goods to manufactures or services [1]. Export volume and composition change [1]. Rising incomes raise imports, especially of capital goods and raw materials [1], and partners whose own goods lose their price advantage may buy more from the emerging economy [1]. [6] Examiner insight: Link the cause (productivity) to the pattern (what is traded, how much, with whom) in a chain. Listing “exports rise” without why leaves the chain incomplete.

6. (a) 450 ÷ 15,000 = 3.0% [1]; 1,260 ÷ 21,000 = 6.0% [1]. (b) E: (1,260 − 450) ÷ 450 = 180% [1]; world: 6,000 ÷ 15,000 = 40% [1]. (c) Tariffs or quotas between the two are lowered [1], so partners’ goods become cheaper relative to others, and trade rises [1]. [6] Examiner insight: Use the earlier figure as the base for a percentage change. Reasons for changed trade flows need a mechanism, such as lower prices or easier access.

7. (a) Before: 600 × 0.40 = 240 [1]. After: 600 × 0.46 = 276, a rise of 15% [1]. (b) −1.2 × 15 = −18% [1]. (c) Before 3,000 × 240 = 720,000; after 2,460 × 276 = 678,960 [1], a fall of 5.7% [1]. [5] Examiner insight: Work in one currency throughout and show the volume change before the revenue change. Quoting the percentages without the totals leaves the working invisible.

8. (a) Year 2: 118 ÷ 104 × 100 = 113.5 [1]. Year 3: 118 ÷ 131 × 100 = 90.1 [1]. (b) (90.1 − 113.5) ÷ 113.5 [1] = −20.6% [1]. (c) A deterioration: each unit of exports buys about 21% fewer imports, caused wholly by dearer imports [1]. [5] Examiner insight: Put export prices on top. Always say what the move means in terms of imports obtained, not just “worse”.

9. (a) 1.09 ÷ 1.04 = 1.048 [1], a rise of 4.8% [1]. (b) Higher unit costs raise export prices [1], which raises the terms of trade but reduces competitiveness, so volumes may fall [1]. (c) 1.07 ÷ 1.03 = 1.039 [1], a relative rise of 3.9% [1]. [6] Examiner insight: Distinguish what happens to the index from what happens to competitiveness; they can move in opposite directions. Divide the two growth factors rather than subtracting percentages.

10. (a) Quantity falls 0.6 × 8 = 4.8%, to 2,380 [1]. New price 43.2 [1]. Revenue 2,380 × 43.2 = 102,816, up 2.8% [1]. (b) Quantity falls 2.1 × 8 = 16.8%, to 2,080 [1]. Revenue 2,080 × 43.2 = 89,856, down 10.1% [1]. [5] Examiner insight: The same price rise gives different revenue results; saying so, with both figures, shows understanding of elasticity.

11. (a) 100 ÷ 115 × 100 = 87.0 [1]. (b) Volume falls 0.3 × 15 = 4.5%, so volume factor 0.955 [1]. New import bill 3,800 × 1.15 × 0.955 = 4,173 [1]. Balance 4,000 − 4,173 = −173, a deficit [1]. (c) Analysis: each unit of exports buys 13% fewer imports [1], so real income and living standards fall where imports are important [1]. With inelastic import demand the bill rises, so the balance moves from surplus to deficit [1]. Evaluation: with elastic import demand the volume fall could offset the price rise [1]. It depends on the cause, since a fall driven by lower export prices after productivity gains may raise export volumes and jobs [1]. Judgement: not necessarily; it depends on elasticities, the time period and the share of imports in spending [1]. [10] Examiner insight: A judgement that names the conditions it depends on, and uses the figures from the question, shows evaluation. Repeating that a deterioration “is bad” does not.

Where marks are usually lost

• Placing import prices on top of the index formula.
• Using the later figure as the base when finding a percentage change.
• Confusing absolute and comparative advantage.
• Calculating opportunity cost the wrong way round.
• Giving a limitation but not saying how it reduces the gains.
• Stating that a rise in export prices raises revenue without considering elasticity.
• Leaving out units or labelling a deficit as a positive number.
• Describing a change in the terms of trade without saying what it means for imports obtained.
• Ending an evaluation with a summary but no judgement.

Next steps

• Review with the revision notes and the study guide.
• Course hub: Edexcel A Level Economics; track progress with the printable checklist.
• Try all free 10-minute diagnostics.
• Book a free trial class: /trial/.

Official syllabus

Pearson Edexcel International Advanced Subsidiary/Advanced Level in Economics, Specification, Issue 2, June 2018, Pearson Education Limited: Unit 4, section 4.3.2 Trade and the global economy, statements 1 to 3.