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S6 Economics | International Trade and Comparative Advantage Paper 3 (Challenge)
S6 Economics | International Trade and Comparative Advantage Paper 3 (Challenge)
Push the model towards reality: the slope of the production possibility curve, three countries trading at once, how freight narrows or even kills trade, plus economies of scale, infant industry arguments and deteriorating terms of trade.
Attempt first, mark afterwards Allow about thirty-five minutes; most items ask why, so state the condition and the direction of the effect, not just the conclusion.
01 Paper details (check answers afterwards)
| Item | Detail |
|---|---|
| Questions | 10 items |
| Suggested time | About 35 minutes |
| Difficulty mix | Foundation 4 · Intermediate 3 · Challenge 2 · Error redo 1 |
| Chapter | Chapter: S6 Economics | International Trade and Comparative Advantage |
| Level | S6 (Secondary 6) Economics |
02 Questions (10 items)
- FoundationA country has 100 hours, needing 2 hours per unit of rice and 4 per unit of cloth. What are the intercepts and slope of its production possibility curve?
- FoundationThree countries have opportunity costs of rice at 0.5, 0.8 and 1.5 units of cloth (A, B, C). With all three trading, who should export rice?
- FoundationX’s cost of rice is 0.5 cloth and Y would give up 2 cloth to make its own. If shipping costs 0.8 cloth per unit, does trade still occur?
- FoundationIf freight rises to 1.6 cloth per unit, what changes?
- IntermediateTwo countries have no comparative advantage, but scaling up in one of them cuts average cost from 100 to 60. What kind of trade is this, and how large is the fall?
- IntermediateA new industry has a unit cost of 120 against an import price of 80, and could reach 60 once mature. How far must cost fall to match the import price?
- IntermediateThe government pays 500 (ten thousand) in subsidy and the industry’s profit rises by 300. What is the net cost to taxpayers, and what does this show about strategic trade policy?
- ChallengeExport prices fall 10%% while import prices rise 5%%. What happens to the terms of trade index, and why are primary product exporters especially exposed?
- ChallengeX specialises with 12 rice and trades at one rice for 1.5 cloth, exporting 4 rice. Measured in cloth, how much do X and Y each gain, given autarky bundles of 6 rice 3 cloth for X and 2 rice 4 cloth for Y?
- Error redoError review: a student claims that any country with a comparative advantage should specialise 100 percent in that good. What is wrong with that conclusion?
03 Answers and one-line notes
| # | Answer | One-line note |
|---|---|---|
| 1 | At most 50 rice or 25 cloth, with a slope of 0.5 cloth per rice | 100 / 2 = 50 rice and 100 / 4 = 25 cloth; each extra unit of rice costs 0.5 cloth, so the slope is simply the opportunity cost of rice. |
| 2 | Country A, whose cost of 0.5 cloth is the lowest | The exporter must give up the least other output per unit of rice, so the lowest opportunity cost wins; country C, with the highest cost, is the natural importer. |
| 3 | Yes: the landed cost in Y is 0.5 + 0.8 = 1.3 cloth, still below Y’s own 2 | Freight raises the exporter’s delivered cost but does not change comparative advantage; at 1.3 cloth landed it still beats Y’s 2, so importing pays. |
| 4 | The landed cost becomes 2.1 cloth, above Y’s own 2, so trade disappears | 0.5 + 1.6 = 2.1, which exceeds 2; once freight swallows the whole range of mutually beneficial prices, no trade occurs however strong the comparative advantage. |
| 5 | Intra-industry trade driven by economies of scale, with average cost down 40% | (100 – 60) / 100 x 100 = 40%; economies of scale make two-way trade in the same product pay even when opportunity costs are identical. |
| 6 | At least 33.3%, from 120 down to 80 | (120 – 80) / 120 x 100 = 33.3%; infant industry protection only makes sense if that threshold can plausibly be crossed, otherwise it is a permanent subsidy to inefficiency. |
| 7 | A net cost of 200 (500 – 300); the transfer exceeds any new value created, so taxpayers pay more than the industry gains | 500 – 300 = 200; the subsidy largely shifts profit from taxpayers to firms, and retaliation can shrink the export market as well. |
| 8 | 85.71 on a base of 100, a fall of about 14.29 points | 0.90 / 1.05 x 100 = 85.71; primary products have low income elasticity of demand and concentrated supply, so their prices fall more easily than they rise, a long-run deterioration known as the Prebisch-Singer trend. |
| 9 | X gains 4 cloth and Y gains 2 cloth, 6 in total | X ends with 8 rice and 6 cloth, worth 10.0 cloth at its own cost ratio against 6.0 in autarky, a gain of 4.0 cloth; Y similarly reaches 10.0 against 8.0, a gain of 2.0. |
| 10 | Not necessarily: freight, diseconomies of scale, concentrated risk and deteriorating terms of trade can all make full specialisation worse | Full specialisation is the model’s result only with no transport costs, no risk and fixed prices; keeping some domestic production can spread risk and preserve skills and jobs. |
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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