Chapter 23 Absolute and Comparative Advantages

Economics Inquiry for HKDSE – Macroeconomics 2Chapter 23 Absolute and Comparative Advantages

Multiple Choice Questions

|!|EM53001|!|

A country with an absolute advantage in producing a good

A. has a comparative advantage in producing that good.

B. can produce more of that good than another country with the same amount of resources.

C. has an absolute disadvantage in producing another good.

D. has more resources for producing that good than another country.

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B

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|!|EM53002|!|

Which of the following statements is CORRECT?

A. If a country uses fewer resources than another country in producing good A, this country has

an absolute advantage in producing good A.

B. If the cost of producing good A in a country is lower than another country, this country has

an absolute advantage in producing good A.

C. If a country can produce more good A per unit of resources than another country, the country

has an absolute advantage in producing good A.

D. If a country can produce the same amount of good A as another country, both countries have

absolute advantages in producing good A.

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C

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© Aristo Educational Press Ltd. 23-1


|!|EM53003|!|

Suppose both Country A and Country B produce good X and good Y. If Country A has a comparative

advantage in producing good X,

A. Country A can produce more units of good X per unit of resources than Country B.

B. Country A forgoes a smaller amount of good Y than Country B in producing one unit of

good X.

C. the opportunity cost of producing good X in Country A is lower than that of producing good

Y.

D. Country A has more resources than Country B for producing good X.

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B

A country has a comparative advantage over another country in the production of a good if it can

produce the good at a lower opportunity cost than another country. As Country A has a comparative

advantage in producing good X, Country A forgoes a smaller amount of good Y than Country B in

producing one unit of good X.

Option A is incorrect. The amount of good X that can be produced with one unit of resources for both

countries is not reflected in the question.

Option C is incorrect. It is meaningless to compare the opportunity costs of producing two goods

within a country.

Option D is incorrect. The amount of resources owned by Country A and Country B is not reflected in

the question.

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|!|EM53004|!|

Suppose China and Japan produce toys and watches only. Under which of the following conditions will

China have a comparative advantage in producing watches?

A. The amount of resources used in producing one unit of watches is fewer in China than in

Japan.

B. The same amount of watches can be exchanged for more units of toys in China than in

Japan.

C. Japan has a comparative advantage in producing toys.

D. China has an absolute advantage in producing watches.



##

C

The concept of comparative advantage is reciprocal in nature. When there are two countries and two

goods, if a country has a comparative advantage in producing a good, it will have a comparative

disadvantage in producing the other good. The other country will then have a comparative advantage in

producing the other good. As a result, China will have a comparative advantage in producing watches if

Japan has a comparative advantage in producing toys.

##

|!|EM53005|!|

Suppose both Thailand and Malaysia produce hats and jeans only. If Thailand has more resources than

Malaysia and has an absolute advantage in producing hats,

A. Thailand also has an absolute advantage in producing jeans.

B. Thailand also has a comparative advantage in producing jeans.

C. Malaysia has a comparative advantage in producing jeans.

D. None of the above.

##

D

Option A is incorrect. By definition, a country has an absolute advantage over another country in the

production of a good if, with the same amount of resources, it can produce more of the good than

another country. A country having an absolute advantage in producing a good does not imply that it

also has an absolute advantage in producing another good.

Options B and C are incorrect. There is not enough information to determine the opportunity costs of

producing hats and jeans for the two countries, so we cannot conclude which country has a comparative

advantage in the production of jeans.

##



|!|EM53006|!|

The following table shows the output per unit of resources of Country A and Country B in a certain

year.

Mobile phones (units) Calculators (units)Country A 6 OR 12Country B 9 OR 3

According to the above table, Country A has a comparative advantage in producing _____________

because _____________.

A. calculators … with the same amount of resources, Country A can produce more calculators

than Country B

B. calculators … Country A forgoes fewer units of mobile phones than Country B in producing

one unit of calculators

C. mobile phones … the opportunity cost of producing one unit of mobile phones in Country A

is lower than that in Country B

D. mobile phones … with the same amount of resources, Country A can produce more mobile

phones than Country B

##

B

The opportunity costs of producing mobile phones and calculators in both countries are shown below:

The opportunity cost of producing one unit ofMobile phones Calculators

Country A 2 units of calculators 0.5 unit of mobile phonesCountry B 0.33 unit of calculators 3 units of mobile phones

The opportunity cost of Country A in producing 1 unit of calculators (0.5 unit of mobile phones) is

lower than that of Country B (3 units of mobile phones). Country A thus has a comparative advantage

in producing calculators.

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|!|EM53007|!|

The following table shows the output per unit of resources of England and South Korea respectively.

Computers (units) Cars (units)England 10 OR 20

South Korea 30 OR 70

England has a/an _____________ in producing computers while South Korea has a/an _____________

in producing cars.

A. absolute advantage … absolute advantage

B. absolute advantage … comparative advantage

C. comparative advantage … absolute advantage

D. comparative advantage … comparative disadvantage

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C

As South Korea can produce more units of computers and cars than England per unit of resources,

South Korea has absolute advantages in producing both computers and cars.

The opportunity costs of producing computers and cars in both countries are shown below:

The opportunity cost of producing one unit ofComputers Cars

England 2 units of cars 0.5 unit of computersSouth Korea 2.33 units of cars 0.43 unit of computers

For producing 1 unit of computers, the opportunity cost of England (2 units of cars) is lower than that

of South Korea (2.33 units of cars). England has a comparative advantage in producing computers.

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|!|EM53008|!|

In a barter economy, there is no _____________.

(1) money

(2) comparative advantage

(3) absolute advantage

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

D. (1), (2) and (3)

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A

(1) is correct. A barter economy is an economy in which people exchange goods for other goods.

Money does not exist in a barter economy.

(2) is incorrect. Production of goods involves opportunity costs even in an economy without money.

(3) is incorrect. Production of goods involves resources even in an economy without money.

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|!|EM53009|!|

Which of the following statements about absolute advantage and comparative advantage is/are

CORRECT?

(1) A country can have absolute advantages in producing all goods.

(2) A country cannot have comparative advantages in producing all goods.

(3) A country which has an absolute advantage in producing a good can have a comparative

disadvantage in producing that good.

A. (1) only

B. (1) and (2) only

C. (2) and (3) only

D. (1), (2) and (3)



##

D

(1) is correct. If a country can produce more units of all goods than another country with the same

amount of resources, it has absolute advantages in producing all goods.

(2) is correct. The concept of comparative advantage is reciprocal in nature. A country cannot have

comparative advantages in producing all goods.

(3) is correct. If a country can produce more of a good than another country with the same amount of

resources, but its opportunity cost of producing the good is higher than the other country, then it has an

absolute advantage and a comparative disadvantage in producing the good.

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|!|EM53010|!|

Suppose there are only two countries (Country A and Country B) which produce shoes and shirts. In

producing 1 unit of shoes, Country A uses fewer units of resources than Country B, but it forgoes more

units of shirts than Country B. We can conclude that

A. Country A has an absolute advantage in producing shoes.

B. Country A has a comparative advantage in producing shoes.

C. Country B has a comparative advantage in producing shirts.


##

A

As Country A can use fewer units of resources than Country B to produce 1 unit of shoes, Country A

has an absolute advantage in producing shoes.

Options B and C are incorrect. As Country A forgoes more units of shirts than Country B in producing

1 unit of shoes, the opportunity cost of producing shoes in Country A is higher than that in Country B.

Country B has a comparative advantage in producing shoes.

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|!|EM53011|!|

The following table shows the output per unit of resources of Russia and Taiwan.

Wheat (units) Handbags (units)Russia 4 OR 10Taiwan 7 OR 1

Russia has a/an _____________ in producing handbags because _____________.

A. absolute advantage … Russia’s opportunity cost of producing 1 unit of handbags is lower

than that of Taiwan

B. absolute advantage … with the same amount of resources, Russia can produce more units of

handbags than wheat

C. comparative advantage … Russia’s opportunity cost of producing 1 unit of handbags is

lower than that of producing 1 unit of wheat

D. comparative advantage … Russia’s opportunity cost of producing 1 unit of handbags is

lower than that of Taiwan

##

D

As Russia can produce more units of handbags than Taiwan per unit of resources, Russia has an

absolute advantage in producing handbags.

The opportunity costs of producing wheat and handbags in both countries are shown below:

The opportunity cost of producing one unit ofWheat Handbags

Russia 2.5 units of handbags 0.4 unit of wheatTaiwan 0.14 unit of handbags 7 units of wheat

For producing 1 unit of handbags, the opportunity cost of Russia (0.4 unit of wheat) is lower than that

of Taiwan (7 units of wheat). Therefore, Russia has a comparative advantage in producing handbags.

##



|!|EM53012|!|

Suppose Canada has more resources than South Africa in producing apples and corn. In Canada, the

opportunity cost of producing 1 unit of apples is 5 units of corn. On the other hand, in South Africa, the

opportunity cost of producing 1 unit of corn is 0.4 unit of apples. We can conclude that

A. Canada has an absolute advantage in producing apples.

B. Canada has a comparative advantage in producing corn.

C. South Africa has comparative disadvantages in producing both apples and corn.


##

B

Given the opportunity cost of producing 1 unit of apples in Canada is 5 units of corn, we know that the

opportunity cost of producing 1 unit of corn is 0.2 unit of apples, which is lower than that of South

Africa. Therefore, Canada has a comparative advantage in producing corn.

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|!|EM53013|!|

The following table shows the number of man-hours required in Japan and Italy to produce 1 unit of

MP4 players and cameras.

MP4 players CamerasJapan 2 man-hours 6 man-hoursItaly 5 man-hours 5 man-hours

According to the above table, Japan has a/an _______________ in producing MP4 players while Italy

has a/an _______________ in producing MP4 players.

A. absolute advantage … comparative advantage

B. absolute advantage … comparative disadvantage

C. comparative advantage … absolute advantage

D. comparative disadvantage … absolute advantage



##

B

Japan has an absolute advantage in producing MP4 players as fewer units of man-hours are required to

produce 1 unit of MP4 players.

The opportunity costs of producing MP4 players and cameras in both countries are shown below:

The opportunity cost of producing one unit ofMP4 players Cameras

Japan 0.33 unit of cameras 3 units of MP4 playersItaly 1 unit of cameras 1 unit of MP4 players

For producing 1 unit of MP4 players, the opportunity cost of Japan (0.33 unit of cameras) is lower than

that of Italy (1 unit of cameras). Therefore, Japan has a comparative advantage in producing MP4

players, while Italy has a comparative disadvantage in producing MP4 players.

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|!|EM53014|!|

Suppose Country A has ONE unit of resources while Country B has TWO units of resources. Using all

of their resources, Country A can produce 20 units of good X or 17 units of good Y while Country B

can produce 15 units of good X or 30 units of good Y. We can conclude that

A. Country A will specialise in producing good Y, while Country B will specialise in producing

good X.

B. Country B has an absolute advantage in producing good Y.

C. Country A can produce more units of good X than Country B with the same amount of

resources.




##

C

With one unit of resources, Country A can produce 20 units of good X or 17 units of good Y while

Country B can produce 7.5 units of good X or 15 units of good Y. Therefore, Country A can produce

more units of good X than Country B with the same amount of resources.

Option A is incorrect.

The opportunity costs of producing good X and good Y in both countries are shown below:

The opportunity cost of producing one unit ofGood X Good Y

Country A 0.85 unit of good Y 1.18 units of good XCountry B 2 units of good Y 0.5 unit of good X

For producing 1 unit of good X, the opportunity cost of Country A (0.85 unit of good Y) is lower than

that of Country B (2 units of good Y). Country A has a comparative advantage in producing good X

and it will specialise in producing good X.

Option B is incorrect. With one unit of resources, Country A can produce more good Y (17 units) than

Country B (15 units). Country A has an absolute advantage in producing good Y.

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|!|EM53015|!|

Suppose both New Zealand and Canada use all of their resources to produce rice and milk. New

Zealand can produce more units of both rice and milk than Canada. With ONE unit of resources,

A. New Zealand can produce either more units of rice or milk than Canada.

B. New Zealand can produce more units of both rice and milk than Canada.

C. both countries can only produce one good.


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D

As we don’t know the productivities and opportunity costs of producing rice and milk for the two

countries, both options A and B are uncertain.

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|!|EM53016|!|

To produce 1 unit of tomatoes, Country A needs to use 5 units of resources while Country B only needs

to use 3 units of resources. We can conclude that

A. with the same amount of resources, Country A can produce more units of tomatoes than

Country B.

B. Country B can produce more tomatoes than Country A.

C. Country B has an absolute advantage in producing tomatoes.

D. Country B has a comparative advantage in producing tomatoes.

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C

As Country B can produce 1 unit of tomatoes with fewer resources, Country B has an absolute

advantage in producing tomatoes.

Option A is incorrect. Country B can produce more units of tomatoes than Country A with the same

amount of resources.

Option B is incorrect. As we don’t know the resource endowment of the two countries, we cannot

conclude which country can produce more units of tomatoes.

Option D is incorrect. As there is no information about the opportunity costs of producing tomatoes in

the two countries, we cannot conclude if Country B has a comparative advantage in producing

tomatoes.

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|!|EM53017|!|

Suppose both Country A and Country B produce sweaters and dolls. Labour is the only input used in

production. The following table shows the number of man-hours required by the two countries in the

production of sweaters and dolls.

Sweaters DollsCountry A 2 man-hours 7 man-hoursCountry B 6 man-hours 4 man-hours

With 10 man-hours, Country A can produce _________ units of sweaters or _________ units of dolls

while Country B can produce __________ units of sweaters or ___________ units of dolls.

A. 5 … 1.43 … 1.67 … 2.5

B. 5 … 2.86 … 1.5 … 6.67

C. 10 … 1.43 … 1.5 … 2.5

D. 20 … 1.67 … 1.67 … 1.5

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A

With 10 man-hours, the production of sweaters in Country A = 10/2 = 5 units.

With 10 man-hours, the production of dolls in Country A = 10/7 = 1.43 units.

With 10 man-hours, the production of sweaters in Country B = 10/6 = 1.67 units.

With 10 man-hours, the production of dolls in Country B = 10/4 = 2.5 units.

##

|!|EM53018|!|

Which of the following statements about the principle of comparative advantage is CORRECT?

A. If all countries specialise in the production of a good in which it has a lower opportunity

cost, they will trade with each other.

B. The country with a higher opportunity cost of producing a good will enjoy fewer gains from

trade.

C. If each country specialises in the production of a good for which it has a comparative

advantage, the total output will increase.

D. A country with absolute advantages in producing all goods does not need to trade with other

countries.

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C

The principle of comparative advantage states that if each country specialises in the production of a

good in which it has a lower opportunity cost, the total output will increase.

Option A is incorrect. Whether countries will trade or not depends on whether the terms of trade is

mutually beneficial.

Option B is incorrect. The distribution of gains from trade between countries depends on the terms of

trade.

Option D is incorrect. A country with absolute advantages in producing all goods may still be willing to

trade with other countries, as it is possible for them to enjoy more output.

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|!|EM53019|!|

According to the principle of comparative advantage, which of the following can best explain why

Country Rich does not trade with Country Poor?

A. Country Rich has absolute advantages in producing all goods.

B. Country Poor does not have comparative advantages in producing any goods.

C. The quality of output is different between the two countries.

D. The production costs of the two countries are identical.

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D

If the production costs of the two countries are identical, the opportunity costs of production in the two

countries are the same. Both countries cannot benefit from trading with each other.

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|!|EM53020|!|

Country A and Country B only produce good X and good Y. If Country A has a comparative advantage

in producing good Y, that means

A. Country A can enjoy a larger gain from trade than Country B by exporting good Y.

B. Country A has more resources for producing good Y than Country B.

C. Country A can use fewer resources to produce the same amount of good Y than Country B.

D. Country A will export good Y to Country B if the terms of trade is mutually beneficial.

##



D

According to the principle of comparative advantage, as Country A has a comparative advantage in

producing good Y, it will specialise in producing good Y and will export good Y.

Option A is incorrect. The distribution of gains from trade between the two countries depends on the

terms of trade.

Options B and C are incorrect. The concept of comparative advantage is related to the opportunity cost

of producing a good, but not to the endowment of resources or the use of resources.

##

|!|EM53021|!|

Suppose France and Sweden only produce soft drinks and cheese. Both countries allocate half of their

resources to produce soft drinks and another half to produce cheese. With TWO units of resources, the

amounts of output in France and Sweden are shown below:

Soft drinks (units) Cheese (units)France 3 AND 9Sweden 7 AND 5

Which of the following statements is CORRECT?

A. According to the principle of comparative advantage, France will export soft drinks.

B. France has an absolute advantage in the production of soft drinks.

C. France can produce the same amount of cheese with fewer resources than Sweden.

D. France has a larger gain from trade than Sweden from each unit of cheese traded.



##

C

The following table shows the outputs of both countries when two units of resources are allocated to

produce only one good.

Soft drinks (units) Cheese (units)France 6 OR 18Sweden 14 OR 10

With the same amount of resources, France can produce more units of cheese than Sweden. In other

words, France can produce the same amount of cheese with fewer resources than Sweden.

The opportunity costs of producing soft drinks and cheese in both countries are shown as below:

The opportunity cost of producing one unit ofSoft drinks Cheese

France 3 units of cheese 0.33 unit of soft drinksSweden 0.71 unit of cheese 1.4 units of soft drinks

For producing 1 unit of cheese, the opportunity cost of France (0.33 unit of soft drinks) is lower than

that of Sweden (1.4 units of soft drinks). France has a comparative advantage in producing cheese.

Option A is incorrect. As France has a comparative advantage in producing cheese, according to the

principle of comparative advantage, it will export cheese.

Option B is incorrect. With the same amount of resources, France can produce fewer units of soft

drinks than Sweden. Therefore, France does not have an absolute advantage in producing soft drinks.

Option D is incorrect. The gains from trade of the two countries depend on their terms of trade.

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|!|EM53022|!|

The following table shows the total output of good X and good Y in Country A and Country B after

trade.

Good X (units) Good Y (units)Country A 0 AND 120Country B 300 AND 0

Which of the following statements about the two countries is INCORRECT?

A. Country A can produce more units of good Y than Country B with the same amount of

resources.

B. The total output after trade is more than that before trade.

C. Country A may have absolute advantages in producing both good X and good Y.

D. Country B has a comparative advantage in producing good X.

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A

Option A is incorrect. We only have the information on total output after trade. According to the

principle of comparative advantage, we only know that Country A has a comparative advantage in

producing good Y while Country B has a comparative advantage in producing good X. We do not know

which country can produce more units of good Y with the same amount of resources.

##



|!|EM53023|!|

Suppose Country Rich and Country Poor each hold 5 units of resources. The following table shows the

output of soybeans and laptops per unit of resources in both countries.

Soybeans (units) Laptops (units)Country Rich 2 OR 4Country Poor 1 OR 3

After specialisation, the total output of soybeans is _________ units and the total output of laptops is

_________ units.

A. 5 … 20

B. 10 … 20

C. 10 … 15

D. 30 … 20

##

C

The opportunity costs of producing soybeans and laptops in both countries are shown below:

The opportunity cost of producing one unit ofSoybeans Laptops

Country Rich 2 units of laptops 0.5 unit of soybeansCountry Poor 3 units of laptops 0.33 unit of soybeans

For producing 1 unit of soybeans, the opportunity cost of Country Rich (2 units of laptops) is lower

than that of Country Poor (3 units of laptops). Country Rich has a comparative advantage in producing

soybeans and it will specialise in producing soybeans. Country Poor has a comparative advantage in

producing laptops and it will specialise in producing laptops.

With 5 units of resources in each country, the total outputs of the two countries are shown below:

Soybeans (units) Laptops (units)Country Rich 10 (= 2 × 5) AND 0Country Poor 0 AND 15 (= 3 5)

##



|!|EM53024|!|

Suppose Germany has a comparative advantage in producing cars and Russia has a comparative

advantage in producing wheat. Each country has 20 units of resources. Before specialisation, both

countries allocate 5 units of resources to produce cars and 15 units of resources to produce wheat. The

total outputs of the two countries are shown below:

Cars (units) Wheat (units)Germany 15 AND 15

Russia 5 AND 60

After specialisation, the total output of cars will increase by _________ units and the total output of

wheat will increase by _________ units.

A. 20 … 5

B. 20 … 10

C. 40 … 5

D. 40 … 20



##

C

With 20 units of resources, the total outputs of the two countries before specialisation are 20 units of

cars and 75 units of wheat.

With one unit of resources, the outputs of both countries are shown below:

Cars (units) Wheat (units)Germany 3 OR 1

Russia 1 OR 4

As Germany has a comparative advantage in producing cars and Russia has a comparative advantage in

producing wheat, Germany will specialise in producing cars while Russia will specialise in producing

wheat after specialisation.

The total outputs of the two countries are shown below:

Cars (units) Wheat (units)Germany 60 AND 0

Russia 0 AND 80Total output 60 AND 80

The total output of cars will increase by 40 (60 – 20) units.

The total output of wheat will increase by 5 (80 – 75) units.

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|!|EM53025|!|

Suppose the amount of output per man-hour in Indonesia, Taiwan and Thailand are as follows:

Coconuts (units) Calculators (units)Indonesia 60 OR 30Taiwan 30 OR 50

Thailand 80 OR 20

Which of the following is MOST likely to happen?

A. Indonesia will specialise in producing calculators.

B. Taiwan will specialise in producing coconuts.

C. Thailand will import calculators from Indonesia.

D. Taiwan will import coconuts from Thailand.

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D

The opportunity costs of producing coconuts and calculators in the three countries are shown below:

The opportunity cost of producing one unit ofCoconuts Calculators

Indonesia 0.5 unit of calculators 2 units of coconutsTaiwan 1.67 units of calculators 0.6 unit of coconuts



Thailand 0.25 unit of calculators 4 units of coconuts

Thailand has a comparative advantage in producing coconuts while Taiwan has a comparative

advantage in producing calculators. Therefore, it is most likely that Taiwan will import coconuts from

Thailand.

Option C is incorrect. It is most likely that Thailand will import calculators from Taiwan.

##

|!|EM53026|!|

By using one unit of resources, a country can produce 2 units of good X or 8 units of good Y. We can

conclude that

A. this country has an absolute advantage in producing good Y.

B. this country has a comparative advantage in producing good Y.

C. this country will not import good X if the terms of trade is 1X = 2Y.

D. this country will export good Y if the terms of trade is 1X = 2Y.



##

D

The opportunity cost of producing 1 unit of good X is 4 units of good Y while the opportunity cost of

producing 1 unit of good Y is 0.25 unit of good X.

If the terms of trade is 1X = 2Y, i.e. 1Y = 0.5X, the country can gain 0.25 (= 0.5 – 0.25) unit of good X

by exporting 1 unit of good Y. The country will export good Y.

Options A and B are incorrect. The concepts of absolute advantage and comparative advantage involve

the comparison of two countries. As the question only mentions the information for one country, we

cannot draw any conclusions about the absolute and comparative advantages in producing good X and

good Y.

Option C is incorrect. The opportunity cost of producing 1 unit of good X is 4 units of good Y, which is

higher than the terms of trade (1X = 2Y). The country will import good X.

##

|!|EM53027|!|

The following table shows the amount of resources required to produce 1 unit of washing machines and

1 unit of garments in Country A and Country B respectively.

Washing machines GarmentsCountry A 15 units 7 unitsCountry B 15 units 10 units

Which of the following is a mutually beneficial terms of trade for the two countries?

A. 1 unit of garments = 0.4 unit of washing machines

B. 1 unit of garments = 0.5 unit of washing machines

C. 1 unit of washing machines = 0.5 unit of garments

D. 1 unit of washing machines = 1 unit of garments



##

B

The opportunity costs of producing washing machines and garments in both countries are shown

below:

The opportunity cost of producing one unit ofWashing machines Garments

Country A 2.14 units of garments 0.47 unit of washing machinesCountry B 1.5 units of garments 0.67 unit of washing machines

For producing 1 unit of garments, the opportunity cost of Country A (0.47 unit of washing machines) is

lower than that of Country B (0.67 unit of washing machines). Therefore, Country A has a comparative

advantage in producing garments. For the terms of trade of garments to be mutually beneficial, it

should be:

0.47 unit of washing machines < 1 unit of garments < 0.67 unit of washing machines

If the terms of trade is 1 unit of garments = 0.5 unit of washing machines, it is mutually beneficial.

##

|!|EM53028|!|

Country A can produce 5 units of good X or 10 units of good Y per unit of input. Country B can

produce 4 units of good X or 4 units of good Y per unit of input.

Assume both countries have 10 units of input and complete specialisation takes place after they open

trade with each other. The total outputs of the two countries are __________ units of good X and

__________ units of good Y.

A. 40 … 50

B. 40 … 100

C. 50 … 40

D. 100 … 40



##

B



Country A 2 units of good Y 0.5 unit of good XCountry B 1 unit of good Y 1 unit of good X

Country A has a comparative advantage in producing good Y and Country B has a comparative

advantage in producing good X. Therefore, Country A will specialise in producing good Y and Country

B will specialise in producing good X.

Country A will produce 100 (10 × 10) units of good Y.

Country B will produce 40 (10 × 4) units of good X.

Total outputs of the two countries are 40 units of good X and 100 units of good Y.

##

|!|EM53029|!|

Suppose Country A and Country B produce only two goods. With the same amount of resources,

Country A can produce more output of both goods than Country B. Which of the following is

INCORRECT?

A. Country B may have a comparative advantage in producing one of the good.

B. Country A has absolute advantages in producing the two goods.

C. Country A has lower opportunity costs in producing the two goods than Country B.

D. Trade may still take place between the two countries.

##

C

The concept of comparative advantage is reciprocal in nature. When there are two countries and two

goods, if a country has a comparative advantage in producing a good, it will have a comparative

disadvantage in producing the other good. It is impossible for Country A to have a lower opportunity

cost in producing the two goods than Country B.

##



|!|EM53030|!|

The following table shows the number of man-hours required to produce 1 unit of furniture and 1 unit

of computer software in India and Singapore respectively.

Furniture Computer softwareIndia 10 man-hours 5 man-hours

Singapore 5 man-hours 7 man-hours

Suppose the terms of trade is 1 unit of furniture = 1 unit of computer software. According to the

principle of comparative advantage, when the two countries trade with each other, India will export

____________ and the gain from trade is ____________ per unit of exports.

A. furniture … 1 unit of computer software

B. furniture … 0.5 unit of computer software

C. computer software … 0.4 unit of furniture

D. computer software … 0.5 unit of furniture

##

D

The opportunity costs of producing furniture and computer software in both countries are shown below:

The opportunity cost of producing one unit ofFurniture Computer software

India 2 units of computer software 0.5 unit of furnitureSingapore 0.71 unit of computer software 1.4 units of furniture

For producing 1 unit of computer software, the opportunity cost of India (0.5 unit of furniture) is lower

than that of Singapore (1.4 units of furniture). Therefore, India has a comparative advantage in

producing computer software and will export it. If the terms of trade is 1 unit of furniture = 1 unit of

computer software, India’s gain from trade per unit of exports is (1 – 0.5) unit of furniture = 0.5 unit of

furniture.

##



|!|EM53031|!|

Suppose for an economy, the total output without trade is 30 units of good X or 50 units of good Y.

After specialisation, the economy will import 60 units of good Y by exporting 20 units of good X. The

total quantity of output that the economy can consume after trade is ___________ units of good X and

___________ units of good Y.

A. 10 … 10

B. 10 … 60

C. 20 … 50

D. 30 … 10

##

B

After specialisation, the economy will only produce good X. After exporting 20 units of good X, 10

units of good X are left within the economy. As the economy will not produce good Y, the total quantity

of good Y in the economy is the 60 units of imported good Y.

##

|!|EM53032|!|

The opportunity cost of producing 1 unit of mobile phones in a country is 10 units of potatoes. When

the country trades with another country, it can gain 1 unit of potatoes by exporting 0.2 unit of mobile

phones. Which of the following is the terms of trade between the two countries?

A. 1 unit of mobile phones = 10 units of potatoes

B. 1 unit of mobile phones = 15 units of potatoes

C. 0.2 unit of mobile phones = 1 unit of potatoes

D. 10 units of mobile phones = 1 unit of potatoes

##

B

The opportunity cost of producing 1 unit of mobile phones is 10 units of potatoes.

If the country exports 1 unit of mobile phones, it can gain 5 units of potatoes.

The terms of trade is thus 1 unit of mobile phones = 15 units of potatoes.

##



|!|EM53033|!|

Country Poor requires 40 units of resources to produce 1 unit of DVD players and 10 units of resources

to produce 1 unit of bread. Country Poor can import 5 units of DVD players from Country Rich by

exporting 18 units of bread.

What is Country Poor’s total gain from trade if it imports 20 units of DVD players from Country Rich?

A. 8 units of bread

B. 18 units of bread

C. 20 units of DVD players

D. 40 units of DVD players

##

A

The opportunity cost of producing 1 unit of DVD players is 4 units of bread.

The terms of trade is 1 unit of DVD players = 3.6 (18/5) units of bread.

If Country Poor imports 20 units of DVD players, its total gain from trade is [(4 – 3.6) 20] unit of

bread = 8 units of bread.

##

|!|EM53034|!|

The following table shows the data of an economy.

Good X (units) Good Y (units)Total output without international trade 70 AND 30Total output with international trade 0 AND 50

Suppose that after trade, the economy has 20 units of good X and 40 units of good Y. The terms of trade

is __________.

A. 1X = 0.5Y

B. 1X = 1Y

C. 1X = 1.5Y

D. 1X = 2Y



##

A

With trade, the economy exports 10 (50 – 40) units of good Y and imports 20 units of good X. The

terms of trade is 10Y = 20X, i.e. 1X = 0.5Y.

##

|!|EM53035|!|

If using all of the resources evenly in the production of cookies and spaghetti, Country Rich can

produce 3 units of cookies and 6 units of spaghetti while Country Poor can produce 5 units of cookies

and 2 units of spaghetti.

Both countries will gain from trade if 1 unit of cookies can be exchanged for

A. 0.3 unit of spaghetti.

B. 1.5 units of spaghetti.

C. 2 units of spaghetti.

D. 2.5 units of spaghetti.

##

B

The following table shows the outputs of the two countries when their resources are allocated to

produce only one good.

Cookies (units) Spaghetti (units)Country Rich 6 OR 12Country Poor 10 OR 4

The opportunity costs of producing cookies and spaghetti in both countries are shown below:

The opportunity cost of producing one unit ofCookies Spaghetti

Country Rich 2 units of spaghetti 0.5 unit of cookiesCountry Poor 0.4 unit of spaghetti 2.5 units of cookies

For producing 1 unit of cookies, the opportunity cost of Country Poor (0.4 unit of spaghetti) is lower

than that of Country Rich (2 units of spaghetti). Country Poor thus has a comparative advantage in

producing cookies. The mutually beneficial terms of trade is 0.4 unit of spaghetti < 1 unit of cookies <

2 units of spaghetti. Therefore, both countries will gain from trade if 1 unit of cookies can be

exchanged for 1.5 units of spaghetti.

##

|!|EM53036|!|

The following table shows the outputs of Country Rich and Country Poor when they use all of their



resources in producing umbrellas and sport shoes.

Umbrellas (units) Sport shoes (units)Country Rich 60 OR 30Country Poor 30 OR 10

Which of the following is/are CORRECT?

(1) Country Rich has absolute advantages in producing umbrellas and sport shoes.

(2) According to the principle of comparative advantage, Country Rich will export sport shoes.

(3) If the terms of trade is 1 unit of sport shoes = 2 units of umbrellas, Country Rich can gain

from trade.

A. (1) only

B. (2) only

C. (2) and (3) only

D. (1), (2) and (3)



##

B

The opportunity costs of producing umbrellas and sport shoes in both countries are shown below:

The opportunity cost of producing one unit ofUmbrellas Sport shoes

Country Rich 0.5 unit of sport shoes 2 units of umbrellasCountry Poor 0.33 unit of sport shoes 3 units of umbrellas

For producing 1 unit of sport shoes, the opportunity cost of Country Rich (2 units of umbrellas) is

lower than that of Country Poor (3 units of umbrellas). Country Rich has a comparative advantage in

producing sport shoes. It will specialise in producing sport shoes and will export them.

(1) is incorrect. As we don’t know the endowment of resources of both countries, we cannot conclude

which country has an absolute advantage in production.

(3) is incorrect. The mutually beneficial terms of trade is 2 units of umbrellas < 1 unit of sport shoes <

3 units of umbrellas. If the terms of trade is 1 unit of sport shoes = 2 units of umbrellas, the price of

exported umbrellas for Country Rich is the same as its domestic opportunity cost, so Country Rich

cannot gain from trade.

##

|!|EM53037|!|

_________________ determines the direction of trade while the terms of trade determines the

_________________ between trading countries.

A. Absolute advantage … transaction cost

B. Opportunity cost of production … volume of trade

C. Comparative advantage … gains from trade

D. Resources endowment … possibility of trade



##

C

According to the principle of comparative advantage, if each country specialises in the production of a

good in which it has a lower opportunity cost, the total output will increase. Therefore, comparative

advantage determines the direction of trade.

Terms of trade refers to the amount of goods that a country must export to get one unit of import. It

represents the opportunity cost of obtaining goods through trade rather than producing them within the

country. Therefore, the terms of trade determines the gains from trade between trading countries.

##

|!|EM53038|!|

Suppose a country produces good X and good Y. The resources required in producing one unit of good

X and good Y is 3 units and 0.5 unit respectively. Without international trade, the country produces 100

units of good X and 200 units of good Y. Which of the following is CORRECT if the terms of trade is

1X = 5Y?

A. The country will not trade with another country.

B. The country will only produce good Y.

C. The country will increase its production of good X.


##

B

Domestic opportunity cost of producing 1 unit of good X is 6 units of good Y.

As the terms of trade is 1X = 5Y, the opportunity cost of importing 1 unit of good X is lower than that

of producing it by the country itself. The country will specialise in producing good Y and import good

X.

##



|!|EM53039|!|

The following table shows the amount of resources required to produce 1 unit of washing machines and

air conditioners in Country A and Country B respectively.

Washing machines Air conditionersCountry A X 35Country B 25 20

Suppose the terms of trade is 1 unit of washing machines = 1.5 units of air conditioners. If trade is

mutually beneficial between the two countries, which of the following is a possible value of X?

A. 40

B. 45

C. 50

D. 55

##

D

From the table, we know that Country B’s opportunity cost of producing 1 unit of washing machines is

1.25 (25/20) units of air conditioners. Given the terms of trade is 1 unit of washing machines = 1.5

units of air conditioners, Country B will export washing machines, as its domestic opportunity cost of

producing washing machines is lower than the world price.

For the terms of trade of washing machines to be mutually beneficial, it should be

1.25 units of air conditioners < 1 unit of washing machines (= 1.5 units of air conditioners) < (X/35)

units of air conditioners

Option D is the only possible answer, where Country A’s opportunity cost of producing 1 unit of

washing machines = 1.57 (55/35) units of air conditioners.

##



|!|EM53040|!|

The following table shows the amount of goods that can be produced with 1 unit of resources in

Australia and Germany.

Seaweed (units) Pineapples (units)Australia 22 OR 15Germany 38 OR 10

If the terms of trade changes from 1 unit of pineapples = 2 units of seaweed to 1 unit of pineapples =

2.5 units of seaweed, the gain from trade for Australia by exporting 1 unit of goods will

A. increase by 0.5 unit of pineapples.

B. decrease by 0.5 unit of pineapples.

C. increase by 0.5 unit of seaweed.

D. decrease by 0.5 unit of seaweed.

##

C

The opportunity costs of producing seaweed and pineapples in both countries are shown below:

The opportunity cost of producing one unit ofSeaweed Pineapples

Australia 0.68 unit of pineapples 1.47 units of seaweedGermany 0.26 unit of pineapples 3.8 units of seaweed

Australia has a comparative advantage in producing pineapples and it will export pineapples.

Trade is mutually beneficial if the terms of trade is 1.47 units of seaweed < 1 unit of pineapples < 3.8

units of seaweed.

If the terms of trade changes from 1 unit of pineapples = 2 units of seaweed to 1 unit of pineapples =

2.5 units of seaweed, the gain from trade for Australia by exporting 1 unit of pineapples will increase

by 0.5 (2.5 – 2) unit of seaweed.

##



|!|EM53041|!|

Which of the following will lead to an unfavourable change in the terms of trade for a country?

A. a decrease in export prices

B. a decreases in import prices

C. an improvement in export quality

D. an increase in the productivity of other countries

##

A

A decrease in export prices will lead to a decrease in the gain from trade per unit of exports.

##

|!|EM53042|!|

The opportunity cost of an economy for producing 1 unit of glasses is 8 units of pencils. Suppose the

economy gains 2 units of pencils more per unit of imports after the terms of trade changes to 1 unit of

pencils = 0.2 unit of glasses. Which of the following is the initial terms of trade?

A. 1 unit of glasses = 5 units of pencils

B. 1 unit of glasses = 6 units of pencils

C. 1 unit of glasses = 7 units of pencils

D. 1 unit of glasses = 8 units of pencils

##

C

The domestic opportunity cost: 1 unit of glasses = 8 units of pencils

The new terms of trade: 1 unit of pencils = 0.2 unit of glasses, i.e. 1 unit of glasses = 5 units of pencils

By importing 1 unit of glasses, the economy can gain 3 units of pencils.

As the economy gains 2 more units of pencils per unit of imports after the change of the terms of trade,

this means the initial gain from trade is 1 unit of pencils. Therefore, the initial terms of trade is 1 unit of

glasses = 7 units of pencils.

##



|!|EM53043|!|

Suppose Country A and Country B produce paper and wood only. Country A exports paper whereas

Country B exports wood. After some time, wood production technology in Country B improves. Which

of the following statements is CORRECT?

A. Country B has an absolute advantage in wood production.

B. Given the same terms of trade, Country A will gain more from trade.

C. Given the same terms of trade, Country B will gain more from trade.


##

C

The improved wood production technology in Country B implies that Country B can produce more

woods than before with the same amount of resources. The opportunity cost of producing wood in

Country B will decrease.

The larger the difference between a country’s opportunity cost and the terms of trade, the more the

exporting country can gain from trade. Therefore, given the same terms of trade, Country B will gain

more after the improvement in wood production technology.

##

|!|EM53044|!|

In the trade between England and Brazil, England imports coffee from Brazil, while Brazil imports

dictionaries from England. Under which of the following conditions will the gains from trade for both

England and Brazil increase?

(1) In England, the productivity of coffee increases whereas in Brazil, the productivity of

dictionaries increases.

(2) In England, the productivity of dictionaries increases whereas in Brazil, the productivity of

coffee increases.

(3) The transaction costs paid by the two countries decrease.

A. (1) only

B. (2) only

C. (1) and (3) only

D. (2) and (3) only



##

D

The gain from trade for a country depends on the difference between the terms of trade and its

opportunity cost of production.

(2) is correct. An increase in the productivity of dictionaries in England implies that England can

produce more dictionaries with the same amount of resources. As a result, the opportunity cost of

producing dictionaries falls. Therefore, England’s gain from trade from exporting dictionaries will

increase. By the same token, Brazil’s gain from trade from exporting coffee will increase when the

productivity of coffee in Brazil increases.

(3) is correct. Transaction costs reduce the total gain from trade. Therefore, the gains from trade for

both countries will increase if the transaction costs paid by the two countries decrease.

##

|!|EM53045|!|

Suppose a country can produce 5 units of good X or 8 units of good Y with a certain amount of

resources. The country will export good X if

A. the cost of exchange is zero.

B. the international exchange ratio is 1X = 1.5Y.

C. the international exchange ratio is 1X = 2Y.

D. its productivity in producing good Y increases.

##

C

For producing 1 unit of good X, the opportunity cost of this country is 1.6 units of good Y. The country

can gain from trade if 1 unit of good X can be exchanged for more than 1.6 units of good Y.

If the international exchange ratio is 1X = 2Y, the country can gain from trade by exporting good X.

The gain from trade is (2 – 1.6) unit of good Y = 0.4 unit of good Y.

##



|!|EM53046|!|

Country A produces both oranges and rice initially. After trading with another country, Country A only

produces oranges and imports rice. Country A

A. has an absolute advantage in producing oranges.

B. has a comparative advantage in producing oranges.

C. requires fewer resources than the other country to produce one unit of oranges.

D. bears low cost of exchange.

##

B

According to the principle of comparative advantage, a country will specialise in the production of a

good in which it has a lower opportunity cost. As Country A specialises in producing oranges, it means

that Country A has a comparative advantage in producing oranges.

##

|!|EM53047|!|

If transportation cost decreases after a technological advancement,

A. mutually beneficial trade will become less possible.

B. the gains from trade of the trading partners will increase as long as trade continues.

C. the quality of imports and exports will improve.

D. the price of exported goods will decrease if the importing country has to bear the

transportation costs.

##

B

Transportation costs reduce the gain from trade. Therefore, if transportation cost decreases, the gains

from trade of the trading partners will increase.

##



|!|EM53048|!|

Before trade, the outputs of Country A and Country B with all of their resources evenly allocated to

produce good X and good Y are shown below:

Good X (units) Good Y (units)Country A 8 AND 11Country B 12 AND 10

(a) After trade, the total output of both good X and good Y increases. We can conclude that

A. Country A will gain more than Country B from each unit of good X traded.

B. Country B has a comparative advantage in producing good Y.

C. Country A will export good X.

D. Trade between the two countries will be mutually beneficial if the terms of trade is 1X = 1Y.

(b) Suppose each country has to pay a transportation cost of 0.3 unit of good X in trading 1 unit of

good Y. Which of the following is a mutually beneficial terms of trade?

A. 1X = 0.5Y

B. 1X = 0.7Y

C. 1X = 1Y




##

(a)

D

The following table shows the outputs of Country A and Country B in producing only one good with all

resources.

Good X (units) Good Y (units)Country A 16 OR 22Country B 24 OR 20



Country A 1.38 units of good Y 0.73 unit of good XCountry B 0.83 unit of good Y 1.2 units of good X

For the terms of trade to be mutually beneficial, it should be 0.83 unit of good Y < 1 unit of good X <

1.38 units of good Y. Both countries can gain from trade if the terms of trade is 1X = 1Y.

Option A is incorrect. We cannot tell the distribution of gains from trade between the two countries

unless we know the exact terms of trade.

Option B is incorrect. Country B has a comparative advantage in producing good X, not good Y.

Option C is incorrect. As Country A has a comparative advantage in producing good Y, it will export

good Y.

(b)

D

If the transportation cost of 1 unit of good Y is 1Y = 0.3X for both countries, the minimum amount of

good X that Country A is willing to accept for exporting 1 unit of good Y = Domestic opportunity cost

+ Transportation cost = 0.73X + 0.3X = 1.03X, while the maximum amount of good X that Country B

is willing to pay for importing 1 unit of good Y = 1.2X – 0.3X = 0.9X.

Trade is not mutually beneficial for the two countries.

##



|!|EM53049|!|

Which of the following is a necessary condition for trade to occur between two countries?

A. The two countries have the same resources endowment.

B. The two countries have comparative advantages in producing different goods.

C. The two countries have absolute advantages in producing different goods.

D. The transaction costs are very low.

##

B

If two countries have the same opportunity costs in producing goods, mutually beneficial trade between

them is not possible. It is necessary for the two countries to have different opportunity costs in

producing goods for them to trade with each other.

##

|!|EM53050|!|

For trade to be mutually beneficial between two countries,

(1) the terms of trade must lie between the domestic opportunity costs of producing the goods

for the exporting country and the importing country.

(2) the two countries must bear low transaction costs.

(3) the two countries must have different opportunity costs in producing goods.

A. (1) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)



##

B

(1) is correct. Terms of trade refers to the amount of goods that a country must export to get one unit of

import. It represents the opportunity cost of obtaining goods through trade rather than producing them

within the country. Therefore, the mutually beneficial terms of trade must lie between the domestic

opportunity costs of producing the goods for the exporting country and the importing country.

(3) is correct. If the two countries have the same opportunity costs in producing goods, they cannot

benefit from trading with each other. Therefore, for trade to be mutually beneficial, it is necessary for

the two countries to have different opportunity costs in producing goods.

(2) is incorrect. As long as the total transaction costs do not exceed the total gain from trade, trade can

still be mutually beneficial even if the transaction costs are high.

##

|!|EM53051|!|

When the opportunity costs of producing goods in two countries are identical,

(1) an absolute advantage can still exist.

(2) both countries can have comparative advantages in producing goods.

(3) they will still trade as long as the total transaction costs do not exceed the total gains from

trade.

A. (1) only

B. (2) only

C. (1) and (3) only

D. (2) and (3) only

##

A

(2) is incorrect. Two countries with the same opportunity cost of producing goods implies that neither

of them has a comparative advantage in the production of goods.

(3) is incorrect. As the two countries do not have comparative advantages in production, they cannot

gain from trade and therefore they will not trade.

##



|!|EM53052|!|

Suppose Switzerland and Saudi Arabia are trading partners. Recently, Switzerland decided to stop

importing goods from Saudi Arabia. Which of the following can be a possible reason to explain the

situation?

A. Saudi Arabia has become politically unstable.

B. The Saudi Riyal has depreciated against the Swiss Franc.

C. The technology in Switzerland has improved and fewer resources can be used to produce all

goods.

D. Switzerland can produce all goods at lower opportunity costs than Saudi Arabia.

##

A

If Saudi Arabia is politically unstable, the risk of trade will increase. An increase in insurance premium

may lead to an increase in cost of exchange. If the increased cost of exchange exceeds the total gain

from trade, trade will not exist.

Option B is incorrect. If the Saudi Riyal depreciates against the Swiss Franc, Switzerland will import

more goods from Saudi Arabia instead of stopping its imports of goods from Saudi Arabia.

Option C is incorrect. The two countries will still trade if their opportunity costs of production are

different.

Option D is incorrect. It is not possible for a country to produce all goods at lower opportunity costs

than another country.

##



|!|EM53053|!|

The following table shows the resources required for producing 1 unit of red wine and 1 unit of

chocolate in Japan and Belgium.

Red wine ChocolateJapan 10 units 6 units

Belgium 15 units 3 units

Suppose Belgium needs to pay 0.2 unit of the imported good per unit of exports as transportation cost.

Which of the following can be a mutually beneficial terms of trade between the two countries?

A. 1 unit of red wine = 2 units of chocolate

B. 1 unit of red wine = 2.5 units of chocolate

C. 1 unit of red wine = 3 units of chocolate

D. 1 unit of red wine = 3.5 units of chocolate

##

A

The opportunity costs of producing red wine and chocolate in both countries are shown below:

The opportunity cost of producing one unit ofRed wine Chocolate

Japan 1.67 units of chocolate 0.6 unit of red wineBelgium 5 units of chocolate 0.2 unit of red wine

Without transportation cost, the mutually beneficial terms of trade is 0.2 unit of red wine < 1 unit of

chocolate < 0.6 unit of red wine.

Belgium has a comparative advantage in producing chocolate and it will export chocolate and import

red wine. If the terms of trade is 1 unit of red wine = 2 units of chocolate (i.e. 1 unit of chocolate = 0.5

unit of red wine), after paying 0.2 unit of red wine as the transportation cost, Belgium can still gain 0.1

(0.5 – 0.2 – 0.2) unit of red wine from exporting chocolate.

##



|!|EM53054|!|

Which of the following will affect the total gain from trade of a country?

(1) The trading partner suffers from very bad weather which leads to serious traffic congestion.

(2) The trading partner is politically unstable.

(3) The logistic system of the trading partner improves.

(4) The international petrol price increases sharply.

A. (1) and (2) only

B. (3) and (4) only

C. (2), (3) and (4) only

D. All of the above.

##

D

(1), (2) and (4) will increase the cost of exchange and (3) will reduce the cost of exchange. They all

affect the total gain from trade of a country.

##

|!|EM53055|!|

Which of the following about the pattern of trade in Hong Kong is CORRECT?

(1) Hong Kong relies heavily on imports as it has comparative disadvantages in producing all

goods.

(2) Hong Kong is famous for providing services such as transportation and financial services.

(3) Hong Kong is a major re-export centre.

A. (2) only

B. (1) and (3) only

C. (2) and (3) only

D. (1), (2) and (3)

##

C

(1) is incorrect. A region cannot have comparative disadvantages in producing all goods.

##



|!|EM53056|!|

Which of the following is NOT a benefit of trade to the Hong Kong economy?

A. wider range of goods

B. increased resource endowments

C. closer relationship with trading partners

D. increased employment opportunities

##

B

##



Short Questions

|!|ES53001|!|

(a) What is absolute advantage? (2 marks)

(b) Suppose Country A’s amount of resources is twice that of Country B’s. With the same amount of

resources, the two countries can produce the same amount of good X and good Y. Explain which

country has an absolute advantage in producing good X and good Y respectively. (2 marks)

##

(a) A country has an absolute advantage over another country in the production of a good if, with the

same amount of resources, it can produce more of the good than another country. (2 marks)

(b) As Country A and Country B produce the same amount of good X and good Y with the same

amount of resources, neither Country A nor Country B has an absolute advantage in producing

good X and good Y. (2 marks)

##

|!|ES53002|!|

Assume both Country A and Country B produce two goods only – cruisers and helicopters. Identify

whether Country A has an absolute advantage or a comparative advantage in producing cruisers in the

following situations.

(a) Country A forgoes a smaller amount of helicopters than Country B in producing a unit of cruisers.

(3 marks)

(b) The cost of producing a unit of cruisers in Country A is smaller than that of producing a unit of

helicopters in Country B. (3 marks)

(c) Country A uses fewer resources in producing a unit of cruisers than Country B. (3 marks)

##

(a) Country A has a comparative advantage in producing cruisers. (1 mark)

The amount of helicopters that Country A has to forgo in the production of cruisers is its

opportunity cost of producing cruisers. As Country A forgoes a smaller amount of helicopters than

Country B in producing one unit of cruisers, i.e. lower opportunity cost, Country A has a

comparative advantage in producing cruisers. (2 marks)



(b) We cannot conclude whether Country A has an absolute advantage or a comparative advantage in

producing cruisers. (1 mark)

It is meaningless to compare the opportunity costs of producing two different goods in two

countries. To decide whether Country A has a comparative advantage or an absolute advantage in

producing cruisers, we need to know either the information about the opportunity costs of

producing cruisers or the amount of resources needed in producing cruisers in both countries.

(2 marks)

(c) Country A has an absolute advantage in producing cruisers. (1 mark)

As Country A can use fewer resources in producing a unit of cruisers than Country B, in other

words, with the same amount of resources, Country A can produce more units of cruisers than

Country B. Therefore, Country A has an absolute advantage in producing cruisers. (2 marks)

##

|!|ES53003|!|

Suppose Country Poor has the same amount of resources as Country Rich. Both countries use all of

their resources in production. Their output in a year is shown below:

Beer (units) Orange juice (units)Country Rich 20 OR 30Country Poor 10 OR 25

Explain, respectively, which country has a/an

(a) absolute advantage (3 marks)

(b) comparative advantage (4 marks)

in producing beer.

##

(a) Country Rich has an absolute advantage in producing beer. (1 mark)

As Country Rich can produce more units of beer than Country Poor with the same amount of

resources, Country Rich has an absolute advantage in producing beer. (2 marks)



(b) The opportunity costs of producing beer and orange juice in both countries are shown below:

The opportunity cost of producing one unit ofBeer Orange juice

Country Rich 1.5 units of orange juice 0.67 unit of beerCountry Poor 2.5 units of orange juice 0.4 unit of beer

For producing 1 unit of beer, the opportunity cost of Country Rich is 1.5 units of orange juice.

(1 mark)

For producing 1 unit of beer, the opportunity cost of Country Poor is 2.5 units of orange juice.

(1 mark)

As Country Rich’s opportunity cost of producing beer is lower than that of Country Poor, Country

Rich has a comparative advantage in producing beer. (2 marks)

##

|!|ES53004|!|

Are the following statements correct? Explain.

(a) If a country has a comparative advantage in producing a good, the country must also have an

absolute advantage in producing that good. (3 marks)

(b) If the technology of producing all goods in the United States of America is more advanced than

South Africa, South Africa will have comparative disadvantages in producing all goods. (3 marks)

##

(a) Incorrect. (1 mark)

A country having a comparative advantage in producing a good does not imply that the country

also has an absolute advantage in producing that good, as they are unrelated. Comparative

advantage compares the opportunity cost of production in each country while absolute advantage

compares the productivity per unit of input in each country. (2 marks)

(b) Incorrect. (1 mark)

If the technology of producing all goods in the United States of America is more advanced than

South Africa, we can only conclude that the United States of America has absolute advantages in

producing all goods. However, it cannot have comparative advantages in producing all goods, as

the concept of comparative advantage is reciprocal in nature. (2 marks)

##



|!|ES53005|!|

By using all of their resources, the output of pistols and grenades of Spain and Russia are as follows:

Pistols (units) Grenades (units)Spain 180 OR 80Russia 100 OR 150

Suppose both Spain and Russia use 80% of their resources to produce pistols and 20% of their

resources to produce grenades.

(a) What is the output of Spain? (2 marks)

(b) What is the output of Russia? (2 marks)

(c) Which country has a comparative advantage in producing pistols? (4 marks)

##

(a) Spain’s output of pistols: 180 units 80% = 144 units (1 mark)

Spain’s output of grenades: 80 units 20% = 16 units (1 mark)

(b) Russia’s output of pistols: 100 units 80% = 80 units (1 mark)

Russia’s output of grenades: 150 units 20% = 30 units (1 mark)

(c) For producing 1 unit of pistols, the opportunity cost of Spain is 0.44 unit of grenades. (1 mark)

For producing 1 unit of pistols, the opportunity cost of Russia is 1.5 units of grenades. (1 mark)

As Spain’s opportunity cost of producing pistols is lower than that of Russia, Spain has a

comparative advantage in producing pistols. (2 marks)

##

|!|ES53006|!|

(a) State the principle of comparative advantage. (2 marks)

(b) Suppose two countries have different endowment of resources. However, they have the same

technology level in producing all goods, which means for a given amount of resources, they can

produce the same amount of output. Explain whether the total output will increase if the two

countries specialise in production. (3 marks)

##

(a) The principle of comparative advantage states that if each country specialises in the production of

a good in which it has a lower opportunity cost, the total output will increase. (2 marks)

(b) If the two countries have the same technology level in producing all goods, no country has an



absolute advantage or a comparative advantage in producing a good. As the opportunity costs of

production are the same in the two countries, total output will not increase if they specialise in

production. (3 marks)

##

|!|ES53007|!|

Suppose before specialisation, the output per unit of resources of Country A and Country B are shown

below:

A4 paper (units) Tissue paper (units)Country A 1 OR 8Country B 3 OR 5

(a) Country A and Country B each have 100 units of resources and they allocate 40% of resources to

produce A4 paper and the remaining resources to produce tissue paper. Calculate the total output

of each good. (4 marks)

(b) If the two countries specialise in production, which country will specialise in producing A4 paper

and which country will specialise in producing tissue paper? (4 marks)

##

(a) The outputs of the two countries are shown below:

A4 paper (units) Tissue paper (units)Country A 40 AND 480Country B 120 AND 300

(2 marks)

As a result, the total output of A4 paper is 160 (40 + 120) units while the total output of tissue

paper is 780 (480 + 300) units. (2 marks)



(b) The opportunity costs of producing A4 paper and tissue paper in both countries are shown below:

The opportunity cost of producing one unit ofA4 paper Tissue paper

Country A 8 units of tissue paper 0.125 unit of A4 paperCountry B 1.67 units of tissue paper 0.6 unit of A4 paper

(2 marks)

For producing 1 unit of A4 paper, the opportunity cost of Country B (1.67 units of tissue paper) is

lower than that of Country A (8 units of tissue paper). Therefore, Country B has a comparative

advantage in producing A4 paper and it will specialise in producing A4 paper. Country A has a

comparative advantage in producing tissue paper and it will specialise in producing tissue paper.

(2 marks)

##

|!|ES53008|!|

Suppose when Country A, Country B and Country C use all of their resources for production, the

output of towels and paper are as follows:

Towels (units) Paper (units)Country A 50 OR 80Country B 150 OR 200Country C 120 OR 150

(a) Which country has an absolute advantage in producing towels? (3 marks)

(b) Suppose the three countries engage in trade and the terms of trade is 1 unit of towels = 1.3 units of

paper. Moreover, the exporting country of paper has to pay 0.03 unit of towels per unit of exports

as transportation cost. Which country will export towels and which country will export paper?

(6 marks)



##

(a) A country has an absolute advantage over another country in the production of a good if, with the

same amount of resources, it can produce more of the good than another country. (1 mark)

As we do not have the information about the factor endowments of the three countries, we do not

know the outputs of the three countries when they use the same amount of resources to produce

towels, and we cannot conclude which country has an absolute advantage in producing towels.

(2 marks)

(b) The opportunity costs of producing towels and paper in the three countries are shown below:

The opportunity cost of producing one unit ofTowels Paper

Country A 1.6 units of paper 0.625 unit of towelsCountry B 1.33 units of paper 0.75 unit of towelsCountry C 1.25 units of paper 0.8 unit of towels

(2 marks)

As the terms of trade of towels (1.3 units of paper) is higher than Country C’s opportunity cost in

producing a unit of towels (1.25 units of paper), Country C will export towels. (2 marks)

As the terms of trade of paper (0.77 unit of towels) is higher than Country A’s opportunity cost in

producing a unit of paper plus the transportation cost (0.625 unit of towels + 0.03 unit of towels =

0.655 unit of towels), Country A will export paper. (2 marks)

##

|!|ES53009|!|

The following table shows the amount of two goods produced per unit of resources in Cambodia and

Finland.

Handbags (units) Belts (units)Cambodia 7 OR 15

Finland 5 OR 8

Suppose the terms of trade is 1 unit of belts can exchange for 0.7 unit of handbags. Based on the above

information, explain if the two countries will trade with each other. (4 marks)



##

The opportunity costs of producing handbags and belts in both countries are shown below:

The opportunity cost of producing one unit ofHandbags Belts

Cambodia 2.14 units of belts 0.47 unit of handbagsFinland 1.6 units of belts 0.625 unit of handbags

(2 marks)

The mutually beneficial terms of trade of the two countries is 0.47 unit of handbags < 1 unit of belts <

0.625 unit of handbags. If the terms of trade is 1 unit of belts = 0.7 unit of handbags, it is higher than

the domestic opportunity cost of producing belts in the two countries. Therefore, they will not trade

with each other. (2 marks)

##

|!|ES53010|!|

Suppose the output of computer software and hard disks per unit of resources of Country A and

Country B are as follows:

Computer software (units) Hard disks (units)Country A 120 OR 80Country B 150 OR 200

(a) If the two countries engage in trade, explain which country will export computer software.

(4 marks)

(b) Suppose the terms of trade between the two countries is 1 unit of computer software = 1.2 units of

hard disks. Calculate the gain from trade per unit of computer software exported for the exporting

country. (2 marks)



##

(a) The opportunity costs of producing computer software and hard disks in both countries are shown

below:

The opportunity cost of producing one unit ofComputer software Hard disks

Country A 0.67 unit of hard disks 1.5 units of computer softwareCountry B 1.33 units of hard disks 0.75 unit of computer software

For producing 1 unit of computer software, the opportunity cost of Country A is 0.67 unit of hard

disks. (1 mark)

For producing 1 unit of computer software, the opportunity cost of Country B is 1.33 units of hard

disks. (1 mark)

As Country A’s opportunity cost of producing computer software is lower than that of Country B,

Country A has a comparative advantage in producing computer software and thus it will export

computer software. (2 marks)

(b) Country A’s gain from exporting 1 unit of computer software = (1.2 – 0.67) unit of hard disks =

0.53 unit of hard disks. (2 marks)

##

|!|ES53011|!|

The following table shows the amount of resources required to produce 1 unit of cookies and 1 unit of

coffee in Denmark and Pakistan.

Cookies CoffeeDenmark 70 units 17 unitsPakistan 48 units 32 units

(a) Suppose the transaction cost is zero. According to the above table, calculate the possible range of

terms of trade (for 1 unit of cookies) that is mutually beneficial to both countries. (3 marks)

(b) Suppose Pakistan is politically unstable. The insurance expense is increased which causes an

increase in the cost of exchange. To maintain the trade between the two countries, what is the

maximum amount for the cost of exchange (in terms of cookies)? (3 marks)



##

(a) The opportunity costs of producing cookies and coffee in both countries are shown below:

The opportunity cost of producing one unit ofCookies Coffee

Denmark 4.12 units of coffee 0.24 unit of cookiesPakistan 1.5 units of coffee 0.67 unit of cookies

Denmark’s opportunity cost of producing 1 unit of cookies = 4.12 units of coffee (1 mark)

Pakistan’s opportunity cost of producing 1 unit of cookies = 1.5 units of coffee (1 mark)

The possible range of terms of trade that is mutually beneficial for the two countries is 1.5 units of

coffee < 1 unit of cookies < 4.12 units of coffee. (1 mark)

(b) Denmark’s opportunity cost of producing 1 unit of coffee = 0.24 unit of cookies

Pakistan’s opportunity cost of producing 1 unit of coffee = 0.67 unit of cookies

The maximum amount for the cost of exchange is (0.67 – 0.24) unit of cookies = 0.43 unit of

cookies, otherwise the two countries cannot gain from trade and will stop trading with each other.

(3 marks)

##

|!|ES53012|!|

Suppose the terms of trade between Poland and Mexico is 1 unit of carpets = 8 units of rice wine. With

no transaction cost, Poland can gain 4 units of rice wine by exporting 1 unit of carpets.

(a) Calculate the opportunity cost of producing 1 unit of rice wine in Poland. (2 marks)

(b) If the opportunity cost of producing 1 unit of rice wine in Mexico is 0.1 unit of carpets, what is the

total gain from trade of Mexico by exporting 100 units of rice wine? (3 marks)

##

(a) Poland’s opportunity cost of producing 1 unit of carpets = (8 – 4) units of rice wine = 4 units of

rice wine

Poland’s opportunity cost of producing 1 unit of rice wine = (1 / 4) unit of carpets = 0.25 unit of

carpets (2 marks)

(b) The terms of trade between Poland and Mexico is 1 unit of rice wine = 0.125 unit of carpets.

Mexico can gain 0.025 (0.125 – 0.1) unit of carpets by exporting 1 unit of rice wine.

Mexico’s gain from exporting 100 units of rice wine = (0.025 100) units of carpets = 2.5 units of

carpets (3 marks)

##

|!|ES53013|!|



The output of mangoes and coconuts of Vietnam and Singapore per unit of resources are shown below:

Mangoes (units) Coconuts (units)Vietnam 18 OR 45

Singapore 12 OR 30

(a) According to the principle of comparative advantage, will Vietnam and Singapore trade with each

other? (4 marks)

(b) Suppose Singapore has invented a new production technology in fruits growing. Singapore can

now produce 15 units of mangoes or 50 units of coconuts per unit of resources. With the new

technology, will your answer in part (a) change? (4 marks)

##

(a) The opportunity costs of producing mangoes and coconuts in both countries are shown below:

The opportunity cost of producing one unit ofMangoes Coconuts

Vietnam 2.5 units of coconuts 0.4 unit of mangoesSingapore 2.5 units of coconuts 0.4 unit of mangoes

(2 marks)

Since the opportunity costs of producing mangoes and coconuts are the same in both countries,

neither of them have a comparative advantage in the production of these two goods. Therefore,

they will not trade with each other. (2 marks)



(b) With the new technology, the opportunity costs of producing mangoes and coconuts in both

countries are shown below:

The opportunity cost of producing one unit ofMangoes Coconuts

Vietnam 2.5 units of coconuts 0.4 unit of mangoesSingapore 3.33 units of coconuts 0.3 unit of mangoes

(2 marks)

To produce 1 unit of mangoes, the opportunity cost of Vietnam (2.5 units of coconuts) is lower

than that of Singapore (3.33 units of coconuts). Vietnam has a comparative advantage in

producing mangoes. Vietnam will specialise in producing mangoes and will export mangoes. On

the other hand, for producing 1 unit of coconuts, the opportunity cost of Singapore (0.3 unit of

mangoes) is lower than that of Vietnam (0.4 unit of mangoes). Singapore has a comparative

advantage in producing coconuts. Singapore will specialise in producing coconuts and will export

coconuts. The two countries will trade with each other. (2 marks)

##

|!|ES53014|!|

Suppose South Africa only produces diamonds and green tea. The resources required for producing one

unit of diamonds and green tea is 60 units and 2 units respectively. Without international trade, the

country produces 50 units of diamonds and 250 units of green tea.

If the terms of trade is 1 unit of diamonds = 50 units of green tea, will South Africa trade with other

countries? Explain. (4 marks)

##

Domestic opportunity cost of producing 1 unit of diamonds = 30 units of green tea (1 mark)

The terms of trade: 1 unit of diamonds = 50 units of green tea

Since the opportunity cost of producing 1 unit of diamonds (30 units of green tea) is lower than that of

importing from other countries (50 units of green tea), South Africa can gain from trading with other

countries. South Africa will export diamonds and import green tea. (3 marks)

##



|!|ES53015|!|

The following table shows the amount of goods that can be produced by 1 unit of resources in Turkey

and Portugal.

Skirts (units) Trousers (units)Turkey 13 OR 42

Portugal 16 OR 20

If the terms of trade changes from 1 unit of skirts = 1.5 units of trousers to 1 unit of skirts = 3 units of

trousers, what will be the change in the gain from trade for Turkey by exporting 1 unit of good?

(6 marks)

##

The opportunity costs of producing skirts and trousers in both countries are shown below:

The opportunity cost of producing one unit ofSkirts Trousers

Turkey 3.23 units of trousers 0.31 unit of skirtsPortugal 1.25 units of trousers 0.8 unit of skirts

(2 marks)

To produce 1 unit of trousers, the opportunity cost of Turkey (0.31 unit of skirts) is lower than that of

Portugal (0.8 unit of skirts). Turkey has a comparative advantage in producing trousers. Turkey will

specialise in producing trousers and will export trousers. (1 mark)

If the terms of trade is 1 unit of skirts = 1.5 units of trousers, i.e. 1 unit of trousers = 0.67 unit of skirts,

the gain from trade for Turkey for exporting 1 unit of trousers will be 0.36 (0.67 – 0.31) unit of skirts.

(1 mark)

If the terms of trade changes to 1 unit of skirts = 3 units of trousers, i.e. 1 unit of trousers = 0.33 unit of

skirts, the gain from trade for Turkey for exporting 1 unit of trousers will be 0.02 (0.33 – 0.31) unit of

skirts. (1 mark)

The gain from trade for Turkey decreases by 0.34 (0.36 – 0.02) unit of skirts per unit of trousers

exported. (1 mark)

##



|!|ES53016|!|

Suppose Country A only produces refrigerators and Country B only produces sofas.

Given the same terms of trade, if the two countries engage in trade, which country’s gain from trade

will increase under the following situations?

(a) The technology of producing refrigerators in Country A improves. (3 marks)

(b) The resources for producing refrigerators decrease in Country A while the resources for producing

sofas increase in Country B. (3 marks)

(c) The logistic system between the two countries improves. (3 marks)

##

(a) The improved technology of producing refrigerators in Country A implies that Country A can

produce more refrigerators with the same amount of resources. The opportunity cost of producing

refrigerators in Country A will decrease. Given the same terms of trade, Country A will gain more

after the improvement in technology of producing refrigerators. (3 marks)

(b) The opportunity cost of production is not affected by the change in resource endowment.

Therefore, even if the resource endowments of Country A and Country B change, the gains from

trade for both countries will not change. (3 marks)

(c) The improved logistic system between the two countries implies that the transaction costs paid by

the two countries will decrease. Therefore, both countries’ gains from trade will increase. (3

marks)

##

|!|ES53017|!|

Even if the opportunity costs of producing the same good are different between two countries, they may

not engage in trade. List TWO reasons to explain why. (4 marks)

##

- The two countries will not engage in trade if the terms of trade is not mutually beneficial, i.e. the

terms of trade does not lie between the domestic opportunity costs of producing the goods for the

exporting country and the importing country.

- The two countries will not engage in trade when the total cost of exchange exceeds the total gain from

trade.

- Any reasonable answer(s)

(Mark the FIRST TWO points only, 2 marks each)



##

|!|ES53018|!|

Explain whether the following statements about Hong Hong’s trade are correct or not.

(a) Hong Kong has a comparative advantage in providing services. (2 marks)

(b) Most of the capital goods sold in Hong Kong were produced locally. (2 marks)

(c) Trade leads to higher standard of living of Hong Kong people. (2 marks)

##

(a) Correct. Hong Kong has comparative advantages in providing transportation, financial and trade-

related services. (2 marks)

(b) Incorrect. Hong Kong relies heavily on imports. Most of the capital goods sold in Hong Kong

were imported, but not produced locally. (2 marks)

(c) Correct. Imports like foodstuffs, capital goods and consumer goods from other regions widen the

variety of consumption choices, leading to a higher standard of living of Hong Kong people.

(2 marks)

##



Long Questions

|!|EL53001|!| (revised)

The following table shows the amount of resources required to produce 1 unit of printers and 1 unit of

digital cameras in Colombia and Greece.

Printers Digital camerasColombia 7 units 10 units

Greece 5 units 3 units

(a) Explain which country has an absolute advantage in producing printers. (2 marks)

(b) Explain which country has a comparative advantage in producing printers. (3 marks)

(c) Suppose Colombia and Greece engage in trade. Find the mutually beneficial range of terms of

trade of

(i) printers; and (1 mark)

(ii) digital cameras. (1 mark)

(d) If the terms of trade is 1 unit of digital cameras = 1.1 units of printers, identify whether Colombia

and Greece will trade under the following situations.

(i) The printer exporting country needs to pay 0.1 unit of digital cameras as transportation cost

per unit of exports. (3 marks)

(ii) Both countries need to pay 0.5 unit of printers as transportation cost per unit of digital

cameras traded. (3 marks)

##

(a) As Greece can use fewer resources than Colombia to produce 1 unit of printers, Greece has an

absolute advantage in producing printers. (2 marks)



(b) The opportunity costs of producing printers and digital cameras in both countries are shown

below:

The opportunity cost of producing one unit ofPrinters Digital cameras

Colombia 0.7 unit of digital cameras 1.43 units of printersGreece 1.67 units of digital cameras 0.6 unit of printers

(2 marks)

For producing 1 unit of printers, the opportunity cost of Colombia (0.7 unit of digital cameras) is

lower than that of Greece (1.67 units of digital cameras). Therefore, Colombia has a comparative

advantage in producing printers. (1 mark)

(c) (i) 0.7 unit of digital cameras < 1 unit of printers < 1.67 units of digital cameras (1 mark)

(ii) 0.6 unit of printers < 1 unit of digital cameras < 1.43 units of printers (1 mark)

(d) (i) Being the printer exporting country, Colombia’s gain from trade for exporting 1 unit of

printers

= (1/1.1 – 0.7 – 0.1) unit of digital cameras

= 0.11 unit of digital cameras (1 mark)

Being the printer importing country, Greece’s gain from trade for importing 1 unit of printers

= (1.67 – 1/1.1) unit of digital cameras

= 0.76 unit of digital cameras (1 mark)

As both Colombia and Greece can gain from trade, the two countries will trade with each

other. (1 mark)

(ii) Being the digital camera exporting country, Greece’s gain from trade for exporting 1 unit of

digital cameras

= (1.1 – 0.6 – 0.5) unit of printers

= 0 unit of printers (1 mark)

Being the digital camera importing country, Colombia’s gain from trade for importing 1 unit

of digital cameras

= (1.43 – 1.1 – 0.5) unit of printers

= -0.17 unit of printers (1 mark)

As both countries cannot gain from trade, they will not engage in trade. (1 mark)

##



|!|EL53002|!|

Suppose Country A and Country B have the same amount of labour supply and the labour is evenly

distributed in the production of model cars and fans. Country A can produce 14 units of model cars or

10 units of fans with 1 unit of man-hours, while Country B can produce 12 units of model cars or 7

units of fans with 1 unit of man-hours.

(a) With 1 unit of man-hours, Country A can produce more units of model cars and fans than Country

B. State TWO factors which lead to the difference in labour productivity between the two

countries. (2 marks)

(b) Suppose the labour supply is 200 units of man-hours per year in both countries. Both countries

specialise in producing the good in which they have a comparative advantage and export the good

to each other. Calculate the change of total outputs of the two countries per year after

specialisation. (8 marks)

(c) After specialisation, the average cost of production in both countries decreases. Explain the factor

which leads to a lower average production cost. (2 marks)

##

(a) Factors leading to a higher labour productivity in Country A:

- More and better education and training are provided in Country A so that workers in Country A

are equipped with more knowledge, experience and skills.

- The working conditions of workers are better in Country A.

- Better rewards and benefits are provided to workers in Country A which encourages workers to

work harder.

- The quantity and quality of producer goods are higher in Country A.

- The organisation of labour in is better Country A.


(Mark the FIRST TWO points only, 1 mark each)



(b) With 200 units of man-hours evenly distributed in the production of model cars and fans, the

outputs of the two countries before specialisation per year are shown below:

Model cars (units) Fans (units)Country A 1,400 AND 1,000Country B 1,200 AND 700

Total output 2,600 AND 1,700

(2 marks)

The opportunity costs of producing model cars and fans in both countries are shown below:

The opportunity cost of producing one unit ofModel cars Fans

Country A 0.71 unit of fans 1.4 units of model carsCountry B 0.58 unit of fans 1.71 units of model cars

(2 marks)

To produce 1 unit of fans, the opportunity cost of Country A (1.4 units of model cars) is lower

than that of Country B (1.71 units of model cars). Country A has a comparative advantage in

producing fans and it will specialise in producing fans. Country B has a comparative advantage in

producing model cars and it will specialise in producing model cars. (2 marks)

With 200 units of man-hours in each country, the total output after specialisation is shown below:

Model cars (units) Fans (units)Country A 0 AND 2,000Country B 2,400 AND 0

Total output 2,400 AND 2,000

After specialisation, the total output of fans increases by 300 (2,000 – 1,700) units and the total

output of model cars decreases by 200 (2,400 – 2,600) units. (2 marks)

(c) After specialisation, the scale of production of the two countries increases. The two countries can

benefit from economies of scale and thus lead to a lower average production cost. (2 marks)

##



|!|EL53003|!|

The following table shows the amount of resources required by China and Australia to produce 1 unit

of kiwi fruits or lettuces.

Kiwi fruits LettucesChina 15 units 8 units

Australia 5 units 12 units

The two countries engage in trade, where the terms of trade is 1 unit of kiwi fruits in exchange for 1.5

units of lettuces. The kiwi fruits exporting country needs to pay 0.25 unit of lettuces as the cost of

exchange.

(a) State TWO common examples of the cost of exchange. (2 marks)

(b) Which good will Australia export? Calculate the gain from trade for Australia per unit of exports.

(5 marks)

(c) Suppose China is suffering from drought, which causes the amount of resources required to

produce 1 unit of lettuces to increase to 12 units of resources. Explain whether the two countries

will still engage in trade. (4 marks)

##

(a) - transportation cost

- insurance cost


(Mark the FIRST TWO points only, 1 mark each)



(b) The opportunity costs of producing kiwi fruits and lettuces in both countries are shown below:

The opportunity cost of producing one unit ofKiwi fruits Lettuces

China 1.875 units of lettuces 0.53 unit of kiwi fruitsAustralia 0.42 unit of lettuces 2.4 units of kiwi fruits

(2 marks)

For producing 1 unit of kiwi fruits, the opportunity cost of Australia (0.42 unit of lettuces) is

lower than that of China (1.875 units of lettuces). Therefore, Australia has a comparative

advantage in producing kiwi fruits. It will specialise in producing kiwi fruits and will export kiwi

fruits. (1 mark)

Australia’s gain from trade for exporting 1 unit of kiwi fruits

= (1.5 – 0.42 – 0.25) unit of lettuces

= 0.83 unit of lettuces (2 marks)

(c) If China requires 12 units of resources to produce 1 unit of lettuces, the opportunity costs of

producing kiwi fruits and lettuces in both countries are shown below:

The opportunity cost of producing one unit ofKiwi fruits Lettuces

China 1.25 units of lettuces 0.8 unit of kiwi fruitsAustralia 0.42 unit of lettuces 2.4 units of kiwi fruits

The mutually beneficial terms of trade should be 0.42 unit of lettuces < 1 unit of kiwi fruits < 1.25

units of lettuces, or 0.8 unit of kiwi fruits < 1 unit of lettuces < 2.4 units of kiwi fruits. (2 marks)

As the terms of trade for two countries is 1 unit of kiwi fruits = 1.5 units of lettuces, which does

not lie between the domestic opportunity costs of producing the goods for the two countries, the

two countries will not engage in trade. (2 marks)

##



|!|EL53004|!|

In Country A, 1 unit of resources can be used to produce 20 units of light bulbs or 45 units of batteries.

In Country B, 1 unit of resources can be used to produce 17 units of light bulbs or 30 units of batteries.

Suppose each country has 100 units of resources. Both countries allocate 40% of resources to produce

light bulbs and 60% of resources to produce batteries before trade.

(a) Calculate the opportunity costs of producing light bulbs and batteries in Country A and Country B

respectively. (2 marks)

(b) Calculate the total output of the two goods

(i) before specialisation. (3 marks)

(ii) after specialisation. (3 marks)

(c) Assume 1 unit of light bulbs can be exchanged for 2 units of batteries when the two countries

trade. If trade incurs transportation cost, and the transportation cost for importing 1 unit of light

bulbs is X unit(s) of batteries, what is the maximum amount of X to avoid the two countries stop

trading with each other? (4 marks)

##

(a) Country A’s opportunity cost of producing 1 unit of light bulbs: (45 / 20) = 2.25 units of batteries

(0.5 mark)

Country A’s opportunity cost of producing 1 unit of batteries: (20 / 45) = 0.44 unit of light bulbs

(0.5 mark)

Country B’s opportunity cost of producing 1 unit of light bulbs: (30 / 17) = 1.76 units of batteries

(0.5 mark)

Country B’s opportunity cost of producing 1 unit of batteries: (17 / 30) = 0.57 unit of light bulbs

(0.5 mark)

(b) (i) Before specialisation, Country A produces 800 (20 40) units of light bulbs and 2,700 (45

60) units of batteries. (1 mark)

Country B produces 680 (17 40) units of light bulbs and 1,800 (30 60) units of batteries.

(1 mark)

Therefore, the total output is 1,480 (800 + 680) units of light bulbs and 4,500 (2,700 +

1,800) units of batteries. (1 mark)



(ii) For producing 1 unit of batteries, the opportunity cost of Country A is lower than that of

Country B. Country A will specialise in producing batteries and the output is 4,500 (45

100) units. (1 mark)

For producing 1 unit of light bulbs, the opportunity cost of Country B is lower than that of

Country A. Country B will specialise in producing light bulbs, and the output is 1,700 (17

100) units. (1 mark)

Therefore, the total output is 1,700 units of light bulbs and 4,500 units of batteries. (1 mark)

(c) The mutually beneficial terms of trade is 1.76 units of batteries < 1 unit of light bulbs < 2.25 units

of batteries. Country A’s gain from trade for 1 unit of light bulbs imported is 0.25 (2.25 – 2) unit

of batteries. (2 marks)

If the transportation cost of importing 1 unit of light bulbs exceeds 0.25 unit of batteries, the two

countries will not trade with each other because Country A cannot gain from trade after deducting

the transportation cost. Therefore, the maximum value of X is 0.25. (2 marks)

##


Chapter 23 Absolute and Comparative Advantages

Documents

ba country

good y

country b inproducing

unit of good x

units of good x

unit of resources

unit of watches

fewer resources