DSE Economics | International Trade and Comparative Advantage Teaching Guide (for tutors) | Opportunity Cost, Terms of Trade and Tariff Trade-offs

2026-11-02

Tutor lesson-prep guides · Secondary Economics

Students say free trade is good but start guessing when asked which country should produce what. This lesson uses one opportunity-cost table to link specialisation, terms of trade and tariffs.

Objectives — Students can: (1) derive each country opportunity cost from hourly output and locate comparative advantage; (2) compute the rise in world output after specialisation and set a terms of trade both sides accept; (3) compare a tariff and a quota on price, import volume and who receives the gain.

01 Prerequisites (3-minute check)

If any of these fails, fix it before the lesson starts.

Skill	Quick check	Pass mark
Opportunity cost	How is the next best option costed	Invert the output ratio
Percentages	From 250 to 400 is what rise	Sixty percent
Demand and supply	What happens to quantity demanded when price rises	Move left along the demand curve

02 Lesson flow (60 minutes)

Time	Stage	Tutor does	Student does
0-10 min	Diagnose and cost	Two countries, 100 hours each; write the production table	Derive 2 and 0.33
10-24 min	Find advantage	Compare opportunity costs, not absolute output	A makes cloth, B makes wine
24-36 min	Gains from trade	Use all 100 hours, then add world output	Cloth +60%, wine +20%
36-46 min	Terms of trade	Pick a rate between 0.33 and 2	Set one wine for one cloth
46-56 min	Tariff and quota	Compare price, volume and surplus	Price becomes 500
56-60 min	Exit check	Three items marked live	All three right

03 Teaching script (read it out)

Scene 1: Comparative advantage is about cost, not size

Country A has 100 hours and makes 4 cloth or 2 wine an hour; country B makes 1 cloth or 3 wine an hour.
One wine costs A 2.0 cloth but B only 0.33 cloth, so B should make wine.
Reversed, one cloth costs A 0.5 wine but B 3.0 wine, so A should make cloth.
The rule: absolute output can favour one country on both goods, but comparative advantage always splits one good each.

Ask students: if A is faster at both goods, should A make both (no, compare opportunity cost).

Scene 2: Specialisation is an addition, not a miracle

Before trade each country splits its time: A gets 200 cloth and 100 wine, B gets 50 cloth and 150 wine, so the world has 250 cloth and 250 wine.
With full specialisation A makes 400 cloth and B makes 300 wine, so the world holds 400 cloth and 300 wine: cloth up 150 (+60%) and wine up 50 (+20%).
The gain comes from the same hours of work, reallocated, so it is efficiency rather than extra effort.

Ask students: does world output rise because workers work harder or because tasks are matched better (matching).

Scene 3: Terms of trade sit between the two costs; a tariff moves the price again

A will pay at most 2.0 cloth for one wine and B will accept at least 0.33 cloth, so the rate lies between 0.33 and 2.0 cloth per wine. At one for one, A trades 150 cloth for 150 wine and ends with 250 cloth and 150 wine (cloth +25%, wine +50%), while B ends with 150 cloth and 150 wine (cloth +200%, wine unchanged).
Both gain, but unequally, so answers must discuss the distribution of gains.
A 25% tariff lifts the import price from 400 to 500.0: the price rises, imports fall, producer surplus rises, consumer surplus falls and the government collects the duty; a quota caps volume and produces a similar price effect but the gain goes to whoever holds the licences.

Ask students: what is the key difference between a tariff and a quota (who receives the gain).

04 Question types and worked steps

Type	Example	Steps	Answer
Calculation	Opportunity cost	Invert the output ratio	2.0 cloth per wine
Calculation	World gain after specialisation	Add totals before and after	Cloth +60%
Explanation	Why a small country still trades	Comparative, not absolute, advantage	Give one low-cost example
Essay	Tariff against quota	Price, volume, surplus, recipient	Four rows compared

Sanity check (teach this): An opportunity cost is what is given up, so both countries cannot hold an advantage in the same good.
The terms of trade must lie between the two opportunity costs, otherwise one side refuses.
The specialisation gain comes from reallocating the same hours, not from new technology.
A 25% tariff raises price by 25%, but import volume need not fall by the same percentage: elasticity decides.

05 Independent practice (3 questions)

Question	Answer	What to watch
A opportunity cost of one wine	2.0 cloth	4 divided by 2
World cloth gain after specialisation	+60%	150 over 250
A cloth left after trading 150	250 units	400 minus 150

06 Common mistakes and what to say

Mistake	Student writes	Say this
Judging by absolute output	A is faster at both, so A should make both	Count what is given up: two cloth for A against a third for B.
One-sided terms of trade	Three cloth for one wine	That is beyond B cost, so the rate must sit between 0.33 and 2.
Calling the gain a productivity jump	Specialisation raised productivity	The hours are unchanged; tasks moved to the lower-cost country.
Mixing tariff and quota revenue	Both give the government money	Quota rents go to licence holders, not the government.

07 Homework (paper, section and question numbers)

Practice: comparative advantage and terms of trade — Write the cost table first
Practice: tariffs, quotas and consumer surplus — Compare four items
All lesson-prep guides — Compare the ten-section structure

08 Exit check (last 5 minutes)

Question	Answer	Decision
A opportunity cost of one wine	2.0 cloth	All three right: move to trade policy
World cloth gain	+60%	One wrong: redo the split
Import price after a 25% tariff	500.0	Two wrong: back to act three

09 Tutor FAQ

Must students memorise country data?

No. Papers supply the output table; the skill is converting output into opportunity cost.

Does free trade benefit everyone?

The total rises but import-competing industries lose, so name both winners and losers.

Why use Hong Kong services as an example?

Finance and logistics are the local low-cost case, and the same cost logic applies.

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A TutorZone lesson-prep guide. Written by the TutorZone team; questions and lesson flow are original and are not taken from any school or publisher material.