The reasons for international trade
The reasons for international trade: build the core model, apply it to evidence and qualify conclusions where outcomes depend on context.
9708 section 6.1; AS Level. Checked against Cambridge's 2026–2028 Version 2 (latest version published December 2025) and 2029 Version 1 (published September 2026). Cambridge states that neither version has significant changes affecting teaching. Always follow the syllabus for the candidate's examination year.
Before you begin
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
What determines comparative advantage?
What you will learn
- Distinguish absolute and comparative advantage
- Explain specialisation and free-trade gains using a trading possibility curve
- Calculate and interpret terms of trade
- Evaluate limits to trade-specialisation predictions
Core model and terms
Absolute advantage means producing more output with given resources; comparative advantage means a lower opportunity cost. Specialisation based on comparative advantage can allow countries to trade for combinations beyond their individual production possibilities, but gains depend on costs, mobility, distribution and adjustment.
Apply and evaluate
The terms of trade index compares export prices with import prices: export price index ÷ import price index × 100. A rise can improve purchasing power for imports if export volumes and prices remain relevant, but its effect depends on what a country trades and how quantities respond. Comparative-advantage models simplify technology, costs and factor mobility.
Pause and explain
Which statement best applies the reasons for international trade?
Worked example
Country A’s export-price index is 120 and import-price index is 100. Calculate its terms of trade index.
Show the worked solution
- Terms of trade = 120 ÷ 100 × 100
- Index = 120
- Export prices have risen relative to import prices from the base relationship
Answer Terms of trade = 120 ÷ 100 × 100 → Index = 120 → Export prices have risen relative to import prices from the base relationship
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Country A’s export-price index is 120 and import-price index is 100. Calculate its terms of trade index.
Give me a hint
Divide the export-price index by the import-price index and multiply by 100.
Compare my reasoning
- Terms of trade = 120 ÷ 100 × 100
- Index = 120
- Export prices have risen relative to import prices from the base relationship
Terms of trade = 120 ÷ 100 × 100 Index = 120 Export prices have risen relative to import prices from the base relationship
Look for these in your work
- Terms of trade = 120 ÷ 100 × 100
- Index = 120
- Export prices have risen relative to import prices from the base relationship
Country A can produce either 12 units of rice or 6 units of cloth; Country B can produce 8 rice or 8 cloth. Which country has comparative advantage in cloth?
Give me a hint
Compare the rice forgone for one unit of cloth in each country.
Compare my reasoning
- A gives up 12 ÷ 6 = 2 rice per cloth
- B gives up 8 ÷ 8 = 1 rice per cloth
- B has the lower opportunity cost of cloth
A gives up 12 ÷ 6 = 2 rice per cloth B gives up 8 ÷ 8 = 1 rice per cloth B has the lower opportunity cost of cloth
Look for these in your work
- A gives up 12 ÷ 6 = 2 rice per cloth
- B gives up 8 ÷ 8 = 1 rice per cloth
- B has the lower opportunity cost of cloth
How can a trading possibility curve show potential gains from specialisation and trade?
Give me a hint
Compare feasible combinations before and after voluntary exchange.
Compare my reasoning
- Domestic production is limited by each country’s PPC
- Trade lets output be exchanged at agreed terms
- A consumption bundle beyond the domestic PPC can become feasible
Domestic production is limited by each country’s PPC Trade lets output be exchanged at agreed terms A consumption bundle beyond the domestic PPC can become feasible
Look for these in your work
- Domestic production is limited by each country’s PPC
- Trade lets output be exchanged at agreed terms
- A consumption bundle beyond the domestic PPC can become feasible
A rise in the terms of trade benefits an import-dependent country’s purchasing power, but export revenue falls. Explain why both can occur.
Give me a hint
Separate the price ratio from export quantities and total earnings.
Compare my reasoning
- Higher export prices relative to imports can buy more imports per export unit
- Export volumes may fall
- Total export revenue depends on price and quantity responses
Higher export prices relative to imports can buy more imports per export unit Export volumes may fall Total export revenue depends on price and quantity responses
Look for these in your work
- Higher export prices relative to imports can buy more imports per export unit
- Export volumes may fall
- Total export revenue depends on price and quantity responses
Common mistakes
- Using absolute output totals to infer comparative advantage or assuming a better terms-of-trade index guarantees a current-account surplus.
What can you explain now?
What determines comparative advantage?
Compare with the explanation
Relative opportunity costs
The country with the lower opportunity cost has comparative advantage in that output.
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Make it stick
Before moving on, explain the central idea in the reasons for international trade and state one condition that could change its effect.
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.