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A-Level Economics · Comparative advantage and the gains from trade diagram question

The PPF is STEEPER than the terms-of-trade line. What does that tell you?

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The answer

Making food at home costs 1.5 services per unit, but trading for it costs only 1 — so it pays to import food. Steep line, high opportunity cost; flat line, low. A country imports a good only when the world price is below its own opportunity cost of making it. Read opportunity cost straight off the gradient. At home each unit of food costs 1.5 services (the PPF). Through trade it costs 1 service (the terms of trade). Cheaper to buy than to make, so the country imports food and puts its resources into services — which is the UK's actual pattern: export professional services, import food.

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This is one of 6 questions on the comparative advantage and the gains from trade diagram — every corner lettered, every wrong answer diagnosed.

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