Exam skills How to identify comparative advantage 1

Example 1 The following shows the amount of output that can be produced with each unit of resources. 2 Food (units)Clothes (units) Country X3OR2 Country Y5OR7 a.State which country has an absolute advantage in producing clothes. (1 mark) b.Explain which country has a comparative advantage in producing food. (3 marks) c.Suppose the transaction cost for each unit of food traded is 0.5 units of clothes. Is mutually beneficial trade possible between these two countries? Explain. (3 marks)

Food (units)Clothes (units) Country X3OR2 Country Y5OR7 1. Study the questions carefully The following shows the amount of output that can be produced with each unit of resources. 3 The table shows the amount of output that can be produced, but not the resource requirement. Pay attention to the wording (e.g., OR vs AND).

1. Study the questions carefully 4 Don’t confuse the concepts of absolute advantage and comparative advantage State: No explanation is needed Explain: Explanation is needed You should check the marks the question carries. a.State which country has an absolute advantage in producing clothes. (1 mark) b.Explain which country has a comparative advantage in producing food. (3 marks) c.Suppose the transaction cost for each unit of food traded is 0.5 units of clothes. Is mutually beneficial trade possible between these two countries? Explain. (3 marks)

2. How to tackle the questions? 5 State: No explanation is needed Explain: Explanation is needed a.1 choice b.1 choice + 1 reason c.1 choice + 1 reason a.State which country has an absolute advantage in producing clothes. (1 mark) b.Explain which country has a comparative advantage in producing food. (3 marks) c.Suppose the transaction cost for each unit of food traded is 0.5 units of clothes. Is mutually beneficial trade possible between these two countries? Explain. (3 marks) 1 mark for each choice (answering the country or yes/no) and 2 marks for each reason

2. How to tackle the questions? 6 a.State which country has an absolute advantage in producing clothes. (1 mark) State: No explanation is needed a.1 choice Just tell which country has an absolute advantage; NO elaboration is needed. The following shows the amount of output that can be produced with each unit of resources. Food (units)Clothes (units) Country X3OR2 Country Y5OR7 Both countries produce with the same amount of resources (i.e., 1 unit of resources). In this case, the one which has a greater amount of output will have an absolute advantage in producing the good.

2. How to tackle the questions? 7 a.State which country has an absolute advantage in producing clothes. (1 mark) State: No explanation is needed a.1 choice Just tell which country has an absolute advantage; NO elaboration is needed. The following shows the amount of output that can be produced with each unit of resources. Food (units)Clothes (units) Country X3OR2 Country Y5OR7 Thus, Country Y has an absolute advantage in producing clothes. Answer: Country Y (1 mark)

2. How to tackle the questions? 8 b.Explain which country has a comparative advantage in producing food. (3 marks) Explain: explanation neededb.1 choice + 1 reason Food (units)Clothes (units) Country X3OR2 Country Y5OR7 Which country has a comparative advantage? (1 mark) Reason: Has a lower opportunity cost (2 marks) 3 marks

Answer: Country X, (1 mark) because Country X’s opportunity cost of producing food (2/3 units of clothes) is lower than that of Country Y (7/5 units of clothes). (2 marks) 2. How to tackle the questions? 9 b.Explain which country has a comparative advantage in producing food. (3 marks) Explain: explanation neededb.1 choice + 1 reason Food (units)Clothes (units) Country X3OR2 Country Y5OR7 3 marks If you are familiar with fractions, you may just use fractions in your answer.

Answer: Country X, (1 mark) because Country X’s opportunity cost of producing food (2/3 units of clothes) is lower than that of Country Y (7/5 units of clothes). (2 marks) 2. How to tackle the questions? 10 b.Explain which country has a comparative advantage in producing food. (3 marks) Explain: explanation neededb.1 choice + 1 reason Food (units)Clothes (units) Country X3OR2 Country Y5OR7 3 marks If not, converting fractions into decimals can be helpful

2. How to tackle the questions? 11 c.Suppose the transaction cost for each unit of food traded is 0.5 units of clothes. Is mutually beneficial trade possible between these two countries? Explain. (3 marks) Explain: explanation neededc.1 choice + 1 reason Yes or no? (1 mark) Reason: Whether the potential gain is greater than the transaction cost (2 marks) 3 marks Merely answering ‘Yes’ or ‘No’ without explanation: 0 marks

2. How to tackle the questions? 12 c.Suppose the transaction cost for each unit of food traded is 0.5 units of clothes. Is mutually beneficial trade possible between these two countries? Explain. (3 marks) Explain: explanation neededc.1 choice + 1 reason Yes, (1 mark) because the potential gain from trading 1 unit of food (0.73 units of clothes) is greater than the transaction cost (0.5 units of clothes). (2 marks) 3 marks Make use of previous answers. Don’t repeat the same calculation. Study the questions carefully. Any information can be useful. = 1.4 – 0.67

3. Remark: Answer efficiently Answer JUST what is required with the FEWEST words. Why? 13 It takes time to write. It takes energy to write. You have to write for 135 minutes. Tired  Less efficient for the remaining questions

3. Remark: Answer efficiently Targets 14 Write as few words as possible No missed marks Check the marks the question carries  Don’t miss mark-carrying points Present your points clearly

3. Remark: Answer efficiently 15 If you can get the same marks, which one would you choose? Country Y has an absolute advantage in producing clothes. Absolute advantage in producing clothes means higher productivity in producing clothes. According to the data given, Country Y can produce 7 units of clothes for each unit of resources while Country X can only produce 2 units of clothes with the same amount of resources. Therefore, Country Y has higher productivity in producing clothes. Country Y. a.State which country has an absolute advantage in producing clothes. (1 mark)

3. Remark: Answer efficiently 16 A country has a comparative advantage in producing a good as it has a lower opportunity cost in producing the good. In this case, Country X’s opportunity cost of producing 1 unit of food is 0.67 units of clothes and Country Y’s opportunity cost of producing 1 unit of food is 1.4 units of clothes. By comparing the opportunity costs of both countries, we can conclude that Country X has a comparative advantage in producing food. Country X, because Country X’s opportunity cost of producing food (0.67 units of clothes) is smaller than that for Country Y (1.4 units of clothes). b.Explain which country has a comparative advantage in producing food. (3 marks) If you can get the same marks, which one would you choose?

3. Remark: Answer efficiently 17 Yes, mutually beneficial trade between Country X and Country Y is possible. The potential gain from trading 1 unit of food is equal to 0.73 units of clothes while the transaction cost for each unit of food traded is 0.5 units of clothes. This means that the net gain from trading 1 unit of food is greater than zero. Therefore, mutually beneficial trade is possible. Yes, because the potential gain from trading 1 unit of food (= 0.73 units of clothes) is greater than the transaction cost (0.5 units of clothes). c.Suppose the transaction cost for each unit of food traded is 0.5 units of clothes. Is mutually beneficial trade possible between these two countries? Explain. (3 marks) If you can get the same marks, which one would you choose?

3. Remark: Answer efficiently Keep in mind: 18 Use simple sentences. However, you should make sure that the points are presented clearly and completely. For example: Country X’s cost is 2/3. Cost of what? What does ‘2/3’ mean? What is its unit? (Dollars? Clothes? Food?) It should be: Country X’s cost of producing 1 unit of food is 2/3 units of clothes.

3. Remark: Answer efficiently Keep in mind: 19 Use your own abbreviation only if you have explained it. 11/15 C What is ‘C’? 11/15 C Units of clothes (C) Explain the ‘C’ OR 11/15 units of clothes Don’t use the abbreviation

More examples will be provided later. 20