Trade Theory and Comparative Advantage
~40 min · WEC14 · 4.3.2
WEC14 · 4.3.2 · 40 min
A country that produces every good more efficiently than its neighbour can still gain from trading with it — the decision to specialise never runs on , it runs on , and this lesson derives the difference from first principles rather than defining the two terms side by side.
Key terms in this lesson
Before you read on
Two or three questions on exactly what this lesson teaches. Being wrong here is fine — it's the fastest way to find out what to pay attention to next.
Two different questions about who's 'better' at making something
When a country puts its resources toward the goods it's relatively best at producing, rather than trying to make everything itself, the benefits Pearson's spec asks for (4.3.2.1a) follow directly from the worked chain below: higher total world output from the same global resources, and lower prices and greater variety for consumers through the extra competition brings — a real WEC14 mark scheme (October 2021, Q9, benefits of specialisation and trade to a developed country) credits exactly this as "lower prices for services due to greater allocative efficiency, thus leading to lower global inflation rates (welfare gain through trade)," a downward pull on the general price level, not just on one good's price. For firms inside the specialising industries there's a shot at a small domestic market alone couldn't support — the same mark scheme credits the chain through to its actual conclusion, not economies of scale as an isolated fact: "economies of scale results in lower long-run average costs (LRAC)… reducing its export prices… and therefore leading to higher levels of international competitiveness." That same expansion of trade also raises investment and employment inside the specialising industries themselves — the mirror image of the named below, which lands on the industries that DON'T get the comparative-advantage nod, not the ones that do — and, to the extent it improves a country's trade balance, feeds through into economic growth and rising living standards: the this lesson derives rather than just names.
The costs are just as spec-real (4.3.2.1a), and any evaluation question expects them weighed against the efficiency gain, not ignored: over-specialisation can leave a country's export earnings exposed to a single commodity's price swings (a real vulnerability for economies dependent on one or two primary exports), and can leave it over-dependent on imports for whatever it no longer makes itself — the same October 2021 mark scheme's evaluation band credits exactly this risk, that "developed countries may lack the finance to pay for imports" once specialisation has gone far enough, a genuine risk, not one confined to developing economies alone. The industries that don't get the comparative-advantage nod can see genuine as production shifts abroad — structural, not merely temporary, precisely because those workers' skills rarely transfer straight into the specialising industry's own jobs (occupational immobility of labour), so the job losses don't resolve themselves the way a purely frictional gap would. A country that stops making a good entirely also loses the domestic capacity to produce it quickly again if trade is ever disrupted: the same mark scheme's evaluation band credits the practical version of this risk directly, naming long, efficient supply chains and just-in-time production as leaving both the businesses relying on them and the consumers buying from them exposed to real shortages and price spikes the moment a disruption hits — a strategic cost, not just an efficiency one. Nor is every cost confined to the industries and countries directly involved: the extra output and the extra transport that specialisation and trade both drive can raise genuine external costs — pollution, congestion, and the over-exploitation of resources at the expense of future generations — that a purely output-focused efficiency argument never counts.
Two different comparisons both get called 'advantage' in this topic, and mixing them up is the single most common error the exam tests for (4.3.2.1b). A country has an ABSOLUTE advantage in a good if it produces more of it from the same resources than another country — a straight productivity comparison. A country has a COMPARATIVE advantage in a good if its of producing it — how much of the OTHER good it must give up — is lower than the other country's. These sound similar. They are not the same test, and, as the mechanism below derives rather than just asserts, only one of them actually determines what a country should specialise in.
Mechanism
Why comparative advantage, not absolute advantage, is the correct decision rule
Absolute advantage answers a production question: which country gets more OUTPUT from the same hour of work? Comparative advantage answers a resource-allocation question: which country sacrifices LESS of its other good to make one more unit of this one? A country only has one scarce resource to split between two goods (labour, in the simplified model here), so every hour spent on Good X is an hour not spent on Good Y — the true cost of Good X was never a number in isolation, it was always 'however much of Good Y that same hour could otherwise have made.' That's opportunity cost, and it's necessarily a RELATIVE measure: it compares a country's own two goods against each other, not its raw output against another country's. Absolute advantage compares two countries directly and can point the same way for every good at once — exactly what happens below, where one country out-produces the other in literally everything. Comparative advantage compares a country against ITSELF, and because a fall in the opportunity cost of one good is mechanically a rise in the opportunity cost of the other (they're reciprocals of the same productivity ratio, not two separate facts), a single country can never hold the lower opportunity cost in both goods against the same trading partner. Somebody always has the comparative advantage in each good — even when one side has the absolute advantage in everything — which is exactly why gains from trade survive the case the worked chain below is built to test. This is the exact result David Ricardo set out in 1817, in On the Principles of Political Economy and Taxation — not a modern restatement of an old idea, and not the theory's last word either: the beyond-spec block below traces what Heckscher, Ohlin and Krugman each added afterward to explain WHERE a country's opportunity-cost advantage actually comes from.
Worked, in full
Deriving mutual gains from trade when one country is absolutely better at everything
- 01
Kestria can produce 6 units of textiles OR 2 microchips per worker-hour. Palmira can produce 4 units of textiles OR 1 microchip per worker-hour. Kestria produces more of BOTH goods per hour — a genuine absolute advantage in everything, stated as the premise the rest of this chain has to survive, not defined away.
Earns: K — the premise set up explicitly, including the case the theory is being tested against (absolute advantage in both goods for one side).
- 02
Opportunity cost of a good = (output rate of the OTHER good) ÷ (output rate of THIS good) — computed with python3, not by hand. Kestria: 1 textile costs 2÷6 = 1/3 microchip; 1 microchip costs 6÷2 = 3 textiles. Palmira: 1 textile costs 1÷4 = 1/4 microchip; 1 microchip costs 4÷1 = 4 textiles.
Earns: An1 — the reciprocal relationship between the two opportunity costs made explicit, not left as two unrelated numbers.
- 03
Compare the SAME good's opportunity cost across the two countries. Palmira's opportunity cost of a textile (1/4 microchip) is lower than Kestria's (1/3 microchip) — Palmira has the comparative advantage in textiles. Kestria's opportunity cost of a microchip (3 textiles) is lower than Palmira's (4 textiles) — Kestria has the comparative advantage in microchips. Despite Kestria's absolute dominance in both goods, each country still ends up with exactly one good where it gives up less — because 'gives up less' is a comparison a country makes against ITSELF, and that ranking doesn't have to track raw output at all.
Earns: An2 — the comparative-advantage split derived from the opportunity-cost comparison, landing on the counter-intuitive result (the absolutely weaker country still gets a good) rather than assuming it.
- 04
Give each country a fixed labour force (Kestria 100 hours, Palmira 180 hours) split 50/50 between the two goods pre-trade: Kestria makes 300 textiles + 100 microchips; Palmira makes 360 textiles + 90 microchips. World total: 660 textiles, 190 microchips. Now let each country fully specialise in its comparative-advantage good: Kestria (100 hours → microchips only) makes 200 microchips; Palmira (180 hours → textiles only) makes 720 textiles. World total: 720 textiles, 200 microchips — MORE of both goods than before, from reallocating the exact same resources, with no new technology or labour at all.
Earns: An3 — a genuine, computed increase in total world output from specialisation alone, not an assertion that 'trade increases output.'
- 05
That extra output only becomes a real gain for BOTH countries individually if they can trade at a price strictly between their two opportunity costs (between 0.25 and 0.333 microchips per textile here — NOT the same thing as 'the terms of trade,' a different spec point covered next lesson). At a trade price of 0.3 microchips per textile, Palmira exports 300 textiles to Kestria for 90 microchips. Final consumption: Kestria gets 300 textiles (same as before trade) + 110 microchips (10 more); Palmira gets 420 textiles (60 more) + 90 microchips (same as before trade). Checked against each country's own (PPF) — the boundary, drawn out fully in the diagram below, showing the maximum combination of the two goods that country could produce from its own resources at full stretch: both final bundles sit strictly OUTSIDE that boundary — proof of a genuine gain, not a relabelling of the same outcome.
Earns: Eval — the abstract 'gains from trade' claim cashed out as a specific, checkable consumption bundle for each country, with the boundary condition (trade price between the two opportunity costs) stated as part of the result, not omitted.
x-axis: Textiles (units) · y-axis: Microchips (units)
- Kestria's PPF
- Straight line from (0, 200) to (600, 0) — 100 worker-hours at 2 microchips/hr or 6 textiles/hr. Slope −1/3, exactly Kestria's opportunity cost of a textile derived in the worked chain.
- Palmira's PPF
- Straight line from (0, 180) to (720, 0) — 180 worker-hours at 1 microchip/hr or 4 textiles/hr. Slope −1/4, exactly Palmira's opportunity cost of a textile.
- Kestria's post-trade consumption line
- Starts at Kestria's specialisation point (0, 200) and runs at the trade price (0.3 microchips per textile) instead of Kestria's own 1/3 — shallower than Kestria's PPF, so it lies everywhere outside it except at the shared starting point. Passes through Kestria's actual post-trade bundle (300, 110): 200 − 0.3 × 300 = 110.
- Palmira's post-trade consumption line
- Starts at Palmira's specialisation point (720, 0) and runs at the same trade price, but the mirror-image reason it lies outside Palmira's own PPF is the opposite comparison to Kestria's line: Palmira's own opportunity cost of a textile is only 1/4 (0.25) microchip, so trading at 0.3 microchips per textile gets Palmira MORE microchips per textile given up than its own domestic trade-off would — making this line steeper than Palmira's PPF, not shallower. Passes through Palmira's actual post-trade bundle (420, 90): 0 + 0.3 × (720 − 420) = 90.
- Kestria autarky: (300, 100)
- Pre-trade consumption, 50/50 hour split — sits on Kestria's own PPF.
- Palmira autarky: (360, 90)
- Pre-trade consumption, 50/50 hour split — sits on Palmira's own PPF.
- Kestria post-trade: (300, 110)
- Same textiles as autarky, 10 more microchips — strictly outside Kestria's own PPF.
- Palmira post-trade: (420, 90)
- Same microchips as autarky, 60 more textiles — strictly outside Palmira's own PPF.
Common error: Drawing a single bowed-out (concave) PPF for each country, as if increasing opportunity cost were a general law rather than a real-world complication.
Correct: A straight-line PPF for THIS model specifically — constant opportunity cost is one of the theory's own stated assumptions (see the chain-drill below), not a drawing shortcut, and the two consumption lines only prove a genuine gain because they're compared against the country's own straight-line frontier, not a curved one borrowed from elsewhere in the course.
Why the pattern of world trade keeps shifting
Comparative advantage explains why trade happens between any two countries in any two goods at a given moment. It doesn't explain why the PATTERN of world trade — who trades what with whom, and how much — keeps changing decade to decade, and the spec names that as its own, separate question (4.3.2.2a). Trading-bloc growth and trade liberalisation (falling tariffs inside the WTO framework, and inside regional blocs) both expand trade volume between member countries specifically, independent of any change in comparative advantage itself. Falling transport and communication costs — containerisation, cheaper freight, the internet making services genuinely tradeable — shrink the trade barriers the model above assumes away, letting more of the theoretical gains from trade actually get realised. And TNCs building cross-border supply chains, chasing the lowest-cost location for each separate production stage, spread FDI (and trade in components and part-finished goods) into patterns that shift as relative wage and skill levels shift.
The clearest recent real-world shift examined on this exact spec point (4.3.2.2b): Pearson's own January 2024 mark scheme names 'Emerging economies/the collapse of communism… e.g. China and Eastern Europe' as a cause of changing trade patterns — entire new low-cost manufacturing bases opening to world trade almost overnight. The same mark scheme's evaluation content then names the reverse move, for the same country: 'Increased labour costs, e.g. China, have now resulted in the return of manufacturing industries to developed economies' — one cause pulling trade toward a country as a low-cost base, a later cause pulling some of that trade back out once its own costs rise. This isn't a change in what China is comparatively best at producing in any deep sense — it's a change in the SIZE of an opportunity-cost gap that was already there, now large enough (or small enough) to be worth the transport cost and hassle of trading on it.
Exchange-rate movements shift trade patterns the same way, without touching comparative advantage at all: the same mark scheme cites 'currency wars' — 'China: currency controls to prevent appreciation of their currency' — as a distinct factor. A weaker currency makes a country's exports cheaper for foreign buyers and its imports more expensive, in BOTH cases through the price paid, not through any change in the underlying opportunity-cost ratio the country actually faces. Confusing a price-competitiveness effect with a comparative-advantage effect is exactly the kind of substitution the conditional-judgement drill below is built to catch.
In your own words
In one sentence: why can a country with an absolute advantage in every good still have a comparative advantage in only one of them?
Complete it yourself
Complete the chain — the assumptions behind the comparative-advantage model, and why relaxing them matters
- 01
The worked derivation above assumes constant opportunity cost — Kestria's PPF and Palmira's PPF are both straight lines, so the 'price' of one more textile in microchips forgone never changes no matter how much of each good is already being produced.
- 02
It also assumes just two countries, two goods, and one factor of production (labour), and that labour is perfectly mobile between industries inside each country but cannot move between countries at all.
Named traps
- reading-the-opportunity-cost-table-backwards
- The single weakest-answered MCQ of the October 2024 series turned on reading an opportunity-cost table in the wrong direction: the examiner report records that "many candidates were unable to correctly deduce from the data Country X has a lower opportunity cost in the production of watches whereas Country Y has a lower opportunity cost in the production of batteries." The fix is mechanical: compute BOTH countries' opportunity cost for the SAME good, then compare — the country that gives up LESS of the other good has the comparative advantage in that good. Don't eyeball which number in a table 'looks bigger' as if a bigger number were automatically an advantage; a bigger opportunity cost is a disadvantage.
- no-comparative-advantage-is-a-real-answer
- January 2022's Q5 was a confirmed examiner-report exception to the usual pattern that this topic is answered well: a PPF/opportunity-cost table question 'candidates tended to perform less well' on, because the correct answer required recognising that neither country had a comparative advantage over the other — their opportunity-cost ratios were identical. 'One country produces more of everything' (absolute advantage) is not the same test as 'the two countries' opportunity-cost ratios differ' (comparative advantage exists at all) — sometimes they genuinely don't, and the honest answer is that specialisation offers no gain, not that one side must be picked anyway. See prequestion 2 above for a worked version of exactly this boundary case.
- absolute-advantage-is-not-the-decision-rule
- The most common conceptual slip on this topic: treating absolute advantage — who produces MORE per hour — as the rule for deciding who should specialise in what. It isn't; comparative advantage — who gives up LESS of the other good — is the actual decision rule. The worked chain above exists specifically to show a case where the two rules point in opposite directions for one of the two goods: Kestria is absolutely better at everything, but Palmira is still the country with the comparative advantage in textiles. Naming the right specialising country while citing absolute productivity as the reason (rather than the opportunity-cost comparison) gets the country right and the mark wrong — see MCQ 1 below.
- patterns-of-trade-causes-vs-comparative-advantage-causes
- Confirmed in the January 2024 examiner report: candidates asked to evaluate factors influencing patterns of trade between countries conflated the question with comparative-advantage causes generically, rather than working through the specific factors list (trading-bloc size, protectionism, exchange rates, competitiveness, FDI, deindustrialisation) — and scored the weakest of that series' three Section C questions as a result. Comparative advantage explains WHY trade happens between two particular countries in two particular goods; patterns of trade is a separate question about WHERE and HOW MUCH trade flows shift over time, and the two need different named factors, not the same paragraph reused under a different heading.
- comparative-advantage-price-range-is-not-terms-of-trade
- The trade price used in the worked chain above (any value strictly between the two countries' domestic opportunity costs) is NOT the same thing as 'the terms of trade' — that's a separate spec point (4.3.2.3, next lesson), built from a different formula (an index of export prices over import prices, ×100) and used to track a country's trading position over time, not to prove that mutually beneficial trade exists in the first place. Using the phrase 'terms of trade' to describe the exchange-price range derived in this lesson is a scope error, not just loose vocabulary — and it's exactly the kind of adjacent-spec-point conflation this course's research process is built to catch before it reaches a lesson.
The conditional move
Complete: "Two countries will genuinely gain from trading according to comparative advantage only if ___."
Complete: "A falling export share in a good is evidence that a country has lost its comparative advantage in that good only if ___."
Beyond the spec
Pearson's spec asks for 'the theory of comparative advantage' without naming who derived it or how the theory has since been extended — knowing both is what lets an answer defend the theory's limitations with real intellectual history instead of a generic 'assumptions might not hold' hedge, and it's a layer every free revision resource checked for this topic skips entirely.
David Ricardo derived comparative advantage in On the Principles of Political Economy and Taxation (1817), illustrating it with England and Portugal trading cloth and wine — the same numeric structure as the worked chain above, just with different goods and numbers. Ricardo's theory takes the opportunity-cost difference between countries as a given fact; Eli Heckscher and Bertil Ohlin later asked WHY one country ends up with a lower opportunity cost than another in the first place. The Heckscher-Ohlin theorem (developed 1919-1933) supplies a mechanism: a country's comparative advantage tracks its relative abundance of factors of production, so a labour-abundant country's opportunity cost of a labour-intensive good is naturally lower, and a capital-abundant country's opportunity cost of a capital-intensive good is naturally lower, purely from factor supply, before any difference in skill or technology is even considered. Paul Krugman's 'new trade theory' (developed from the late 1970s, part of the work behind his 2008 Nobel Memorial Prize in Economic Sciences) points at the classical theory's biggest empirical gap: a large share of real-world trade is INTRA-industry — Germany exports cars to France and imports cars from France — which comparative advantage, built entirely on countries trading DIFFERENT goods, has no mechanism to explain at all. Krugman's answer runs through economies of scale and product differentiation under imperfect competition — a genuinely different mechanism sitting alongside comparative advantage, not replacing it, since most world trade still runs on the classical logic this lesson derives.
Retrieval — with feedback on every choice
Solaria can produce 8 tonnes of rice or 4 tonnes of steel per worker-hour. Emberwood can produce 5 tonnes of rice or 1 tonne of steel per worker-hour. Which country has the comparative advantage in steel?
A country's currency depreciates sharply against its trading partners' currencies, while its underlying opportunity costs of production are unchanged. What is the most likely immediate effect on its pattern of trade?
Which one of the following is a genuine limitation of the basic comparative-advantage model, rather than one of its stated conclusions?
Real wages in China have risen substantially over the past two decades. Some multinational manufacturers that previously produced textiles and other labour-intensive goods in China have since relocated that production to lower-wage economies elsewhere, or brought it back to the developed economies where the finished goods are ultimately sold.
Using the concept of comparative advantage, explain why a rise in a country's wage costs can shift the pattern of world trade even without any change in that country's technology or skills. (VERIDIAN-original, same command-word/mark-tariff pattern as a real Section B 'explain' item — not a reproduction of any specific past-paper question.)
Same question, every level
Evaluate the view that a country with an absolute advantage in producing every good has nothing to gain from international trade. (VERIDIAN-original question, written in the style of a WEC14 Section C 20-mark essay — not a reproduction of any past-paper question.)
20 marks available
A country with an absolute advantage produces goods more efficiently than other countries. It might still trade with other countries to get goods that it wants.
Descriptive, no opportunity-cost mechanism, no diagram, no numbers. 'Might still trade' gestures at the right conclusion without demonstrating why.
- Absolute advantage = produces MORE per hour. Comparative advantage = gives up LESS of the other good. Trade runs on comparative advantage.
- One country can have absolute advantage in every good but comparative advantage in only ONE — they're reciprocals.
- Beneficial trade price sits strictly between the two countries' opportunity costs — not the terms-of-trade index (next lesson).
- Assumptions: constant opportunity cost, 2 countries/2 goods, no transport costs or barriers, labour mobile within not between countries.
- Trade patterns shift from trading blocs, exchange rates, changing relative costs (e.g. rising wages → reshoring) — separate from comparative advantage.
Not affiliated with or endorsed by Pearson Edexcel. Every quotation and figure attributed to a mark scheme or examiner report in this lesson was independently verified against the primary Pearson document during the WEC14 research pass, not carried over from prior course material; the numeric worked example (Kestria/Palmira) is an original illustrative construction, not real trade data, and every figure in it was computed with Python, not worked out by hand.
Solaria can produce 8 tonnes of rice or 4 tonnes of steel per worker-hour. Emberwood can produce 5 tonnes of rice or 1 tonne of steel per worker-hour. Which country has the comparative advantage in steel?
- AEmberwood, because it needs to give up more rice to produce a tonne of steel
Giving up MORE of the other good is a worse trade-off, not an advantage — this reads the opportunity-cost comparison backwards. Emberwood's opportunity cost of steel is 5 tonnes of rice, higher than Solaria's 2 tonnes.
- Solaria, because its opportunity cost of producing steel (2 tonnes of rice) is lower than Emberwood's (5 tonnes of rice)
Correct. Opportunity cost of steel = rice rate ÷ steel rate: Solaria 8÷4 = 2, Emberwood 5÷1 = 5. Solaria gives up less rice per tonne of steel, so it holds the comparative advantage in steel — Emberwood, despite its absolute disadvantage in both goods, holds the comparative advantage in rice instead (its opportunity cost of rice, 1÷5 = 0.2 steel, beats Solaria's 4÷8 = 0.5 steel).
- CSolaria, because it produces more steel per hour in absolute terms
This names the right country but the wrong test — absolute output per hour is not the comparative-advantage comparison. It only happens to land on the correct country here because Solaria's absolute lead in steel (4x) is proportionally larger than its lead in rice; run the actual opportunity-cost numbers, don't infer from which output number is bigger.
- DNeither — comparative advantage requires the two countries' opportunity costs to be exactly equal
This has the condition backwards: EQUAL opportunity costs (as in prequestion 2 above) mean neither country has a comparative advantage. A comparative advantage exists precisely when the two countries' opportunity costs DIFFER, which they clearly do here (2 versus 5).
Traps tested: Opportunity cost direction reversed · Absolute advantage used as justification · Confuses no advantage condition with advantage condition
A country's currency depreciates sharply against its trading partners' currencies, while its underlying opportunity costs of production are unchanged. What is the most likely immediate effect on its pattern of trade?
- AIts comparative advantage in every good improves, since its costs are now lower in foreign-currency terms
Comparative advantage is defined by a country's own domestic opportunity-cost trade-offs, which an exchange-rate move doesn't touch at all — this is a price-competitiveness effect, a separate mechanism from comparative advantage.
- BNothing changes, because trade patterns are determined only by comparative advantage
This is exactly the substitution the conditional-judgement drill above warns against — comparative advantage explains the underlying case for trade, but exchange rates, trading-bloc membership and protectionism are all real, separate factors that shift observed trade patterns on their own.
- Its exports become cheaper for foreign buyers and its imports become more expensive, so export volumes are likely to rise and import volumes likely to fall — a shift in trade PATTERN, not in comparative advantage itself
Correct. A weaker currency changes the price foreign buyers and domestic buyers actually pay, in both directions, without changing the country's underlying opportunity-cost ratios — exactly the pattern-of-trade factor spec point 4.3.2.2 is testing.
- DIts comparative advantage shifts entirely from goods to services
A currency move changes relative prices; it has no mechanism for reassigning which broad SECTOR a country's opportunity-cost advantage sits in.
Traps tested: Conflates price competitiveness with comparative advantage · Ignores non comparative advantage factors · Invents unsupported mechanism
Which one of the following is a genuine limitation of the basic comparative-advantage model, rather than one of its stated conclusions?
- AIt assumes trade increases total world output, which the theory's own derivation shows is false
Rising world output isn't a limitation to flag — it IS the theory's own derived conclusion, confirmed numerically in the worked chain above (660 textiles + 190 microchips pre-trade rising to 720 + 200 post-specialisation).
- BIt assumes only one country can gain from trade at a time
The theory's central claim is the opposite of this — both countries gain simultaneously, which is exactly what stage 5 of the worked chain checks by confirming both countries' post-trade bundles sit outside their own production-possibility frontier.
- CIt assumes comparative advantage cannot exist unless one country has an absolute advantage in every good
The opposite is true and is the whole point of this lesson's worked example — comparative advantage exists regardless of how absolute advantage is split, including the case (used throughout) where one country is absolutely ahead in everything.
- It assumes constant opportunity cost, when real-world production more often shows opportunity cost rising as a country specialises further
Correct — this is the theory's own stated simplifying assumption (see the chain-drill above), and a real limitation: a bowed-out, not straight-line, production-possibility frontier is the more realistic case, which shrinks the predicted gain from trade without eliminating it.
Traps tested: Misstates the theorys own conclusion · Misstates the theory
Real wages in China have risen substantially over the past two decades. Some multinational manufacturers that previously produced textiles and other labour-intensive goods in China have since relocated that production to lower-wage economies elsewhere, or brought it back to the developed economies where the finished goods are ultimately sold.
Using the concept of comparative advantage, explain why a rise in a country's wage costs can shift the pattern of world trade even without any change in that country's technology or skills. (VERIDIAN-original, same command-word/mark-tariff pattern as a real Section B 'explain' item — not a reproduction of any specific past-paper question.)
- A rise in wages raises the labour cost — and therefore the opportunity cost — of producing labour-intensive goods in that country, so its comparative advantage in those goods narrows or is lost to lower-wage economies, even though its actual technology and productivity per worker haven't changed at all; comparative advantage is about relative cost, not raw capability
Correct, and this is the fully-integrated version: it names the mechanism (wages as a cost feeding into opportunity cost), states the direction (comparative advantage narrows/shifts), and explicitly separates this from a technology or productivity change — which is exactly what the question is testing.
- BHigher wages make workers more productive, which increases the country's absolute advantage and therefore its comparative advantage in every good it makes
Wages rising doesn't raise output per worker by itself — pay and productivity are different variables, and the stimulus gives no reason to assume one moved because the other did.
- CThe pattern of trade only changes if the country's government imposes new tariffs — wage costs on their own have no effect on comparative advantage
Wages are a real input cost that feeds directly into opportunity cost, with no tariff required at all — this answer ignores the entire cost side of the opportunity-cost calculation the mechanism block above derives.
- DRising wages always raise a country's living standards, so its pattern of trade will not change unless its comparative advantage in EVERY good is lost simultaneously
Comparative advantage is good-specific, not all-or-nothing — a country can lose it in one labour-intensive good (textiles) while keeping or even gaining it in capital- or skill-intensive goods, which is precisely the shift the stimulus describes (textiles moving out, higher-value goods staying or expanding).
Traps tested: Conflates wages with productivity · Ignores cost side of opportunity cost · Overclaims all or nothing
Practice this for real
This site teaches the mechanism; the exam is sat on Pearson's own real questions. Go find and attempt these yourself — nothing here substitutes for actually sitting a timed paper.
Pearson's official past-papers portalSelect International Advanced Level → Economics → any series, then look for WEC14.
Up next
Terms of Trade, Trading Blocs and Restrictions on Free Trade
A country's terms of trade can rise in the very same year its trade balance gets worse — the index only ever tracks prices, and whether a rise is good news depends entirely on volumes the price ratio can't see.
40 min