How does comparative advantage differ from absolute advantage?

Absolute advantage compares output per unit of resource, while comparative advantage compares what must be given up; specialisation follows comparative advantage.

Does a rising terms of trade index always mean more earnings?

No. The index only tracks price ratios; falling volumes or inelastic demand can still reduce total earnings.

S5 Economics International Trade, Paper 4: opportunity cost, exchange conversion and terms of trade

2026-11-02

Tutor Prep Guide · Primary English

Ten graded items on comparative advantage, exchange rate conversion, tariff revenue, the trade balance and the terms of trade index, each with an answer.

Focus　Compare opportunity costs before dividing the work, multiply or divide by the rate with care, count only the tariff per unit and read an index above 100 as an improvement.

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	Four basic, three advanced, two challenge and one error-repair item

02　Questions (10 items)

FoundationCountry A gives up 2 tonnes of cloth to make one more tonne of rice, while country B gives up 4 tonnes. Who has the lower opportunity cost and who should specialise in rice?
FoundationOne US dollar buys 7.8 Hong Kong dollars. What is a US$50 item worth in Hong Kong dollars?
FoundationThe exchange rate moves from 7.8 to 7.9 Hong Kong dollars per US dollar. What happens to the local price of a US$100 item?
FoundationA country exports $80,000 worth of goods and imports $95,000. What is its trade balance?
IntermediateAn imported good costs $400 per unit and the tariff is 25% on 300 units. What is the total tariff revenue?
IntermediateOne Hong Kong dollar buys 20 yen. How many yen can HK$2,500 buy?
IntermediateThe export price index is 120 and the import price index is 100. What is the terms of trade index, and has it improved or worsened?
ChallengeThe export price index rises from 100 to 115 while the import price index rises from 100 to 105. Find the new terms of trade index and the percentage improvement.
ChallengeCountry A can make 10 tonnes of rice or 5 tonnes of cloth in an hour, and country B can make 6 tonnes of rice or 6 tonnes of cloth. Find the opportunity cost of rice in each and state the absolute and comparative advantages.
Error redoError repair: a student writes that depreciation always improves the trade balance. What is wrong?

03　Answers and one-line notes

#	Answer	One-line note
1	Country A, at 2 tonnes of cloth, so A should specialise in rice	The lower opportunity cost gives comparative advantage: 2 tonnes of cloth per tonne of rice beats 4 tonnes.
2	HK$390	Fifty times 7.8 is 390.
3	It rises from $780 to $790, $10 more	A hundred times 7.9 is 790, which is 10 more than 780.
4	A deficit of $15,000	Exports minus imports is minus 15,000, a negative figure meaning imports exceed exports.
5	$100 per unit, $30,000 in total	Twenty-five per cent of 400 is 100, and 100 times 300 units is 30,000.
6	50,000 yen	2,500 times 20 is 50,000.
7	An index of 120, so the terms of trade improved	Terms of trade divide the export price index by the import price index, and 120 above 100 means the same exports buy more imports.
8	109.5, an improvement of 9.5%	115 divided by 105 times 100 is 109.5, which is 9.5 above the original 100.
9	A: 0.5 tonnes of cloth; B: 1 tonne. A has absolute and comparative advantage in rice, so B should specialise in cloth	Country A makes more rice and gives up less cloth per tonne, so it holds both absolute and comparative advantage in rice, while B should specialise in cloth.
10	It depends on the price elasticities of exports and imports, which must be large enough for the trade balance to improve	Depreciation helps only when demand elasticities are large enough to satisfy the Marshall-Lerner condition; otherwise the trade balance worsens first, tracing a J curve.

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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