How do I find opportunity cost?

Divide the quantity of the other good given up by the quantity of the good being produced.

Does a tariff always raise the local price?

Yes, a tariff raises the landed cost of imports, so the local price rises and imports fall.

S5 Economics, Paper 3: comparative advantage, tariffs and the current account

2026-11-01

Comparative advantage rests on opportunity cost; tariffs and quotas both raise the local price; the current account adds goods, services, income and transfers.

Focus　Work out opportunity costs before deciding specialisation, and add each current account item before calling a surplus or deficit.

01　Paper details (check answers afterwards)

Item	Detail
Questions	10
Suggested time	25
Difficulty mix	Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1
Chapter	Chapter: S5 Economics: International Trade
Level	S5

02　Questions (10 items)

FoundationCountry A can make 10 m of cloth or 5 kg of rice per hour; Country B can make 8 m of cloth or 8 kg of rice. Find the opportunity cost of 1 m of cloth in each country.
FoundationFrom the previous item, which country should specialise in rice, and why?
FoundationAn imported good costs $100 and a 20% ad valorem tariff is imposed. Find the local price.
FoundationHow do an import quota and a tariff differ in their effect on price and quantity?
IntermediateThe export price index is 120 and the import price index is 100. Find the terms of trade index and say whether it improved.
IntermediateThe exchange rate moves from HK$7.8 to HK$7.5 per US dollar. Has the Hong Kong dollar appreciated or depreciated, and what happens to exports?
IntermediateAssuming export demand is elastic, what happens to the volume of exports when the currency depreciates?
ChallengeCurrent account data: goods exports 800, goods imports 900, net services +150 and net income +50 (all in $ billion). Find the current account balance.
ChallengeA country imports 1,000 units, a tariff of $10 per unit is imposed, and imports fall to 900 units. Find the tariff revenue.
Error redoA student says: a country with an absolute advantage must have a comparative advantage. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	Country A: 5 / 10 = 0.5 kg of rice; Country B: 8 / 8 = 1.0 kg of rice.	Opportunity cost is measured by the other good given up.
2	Country B, because 1 kg of rice costs it 1 m of cloth while it costs Country A 2 m.	A country should specialise where its opportunity cost is lower.
3	Local price = 100 x 1.2 = $120.	An ad valorem tariff is a percentage of the import value.
4	Both raise the local price; a quota caps imports directly while a tariff adjusts them through price.	A quota caps the quantity directly while a tariff works through the price.
5	Terms of trade = 120 / 100 x 100 = 120, above 100, so they improved.	A rise in the terms of trade index means the same exports buy more imports.
6	It has appreciated, so exports priced in foreign currency become dearer and less competitive.	Fewer Hong Kong dollars per US dollar means the Hong Kong dollar has appreciated.
7	Exports become cheaper in foreign currency, so export volume rises.	Depreciation lowers the foreign currency price, so export volumes rise.
8	Current account = 800 – 900 + 150 + 50 = +100 billion, a surplus.	The current account covers goods, services, primary income and current transfers.
9	Tariff revenue = 10 x 900 = $9,000.	Tariff revenue is computed on the quantity imported after the tax.
10	Wrong: absolute advantage compares productivity while comparative advantage compares opportunity cost, so a country can lack absolute advantage in both goods yet still have a comparative advantage.	Trade is based on comparative advantage, which depends on opportunity cost, not absolute productivity.

04　What to do after marking

After marking, redo only the wrong items and write down which step went wrong (formula, unit, or misread number).
Repeat the same item two days later; move to the next paper only when both attempts are correct.
Parents only need the answer and note columns; there is no need to explain every item.

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