Countries trade because they can obtain goods more cheaply than they can make them, or goods they cannot make at all. The accounts of that trade are not one number.
The idea
Absolute advantage means a country can produce a good with fewer resources than another. Comparative advantage means a country can produce a good at a lower opportunity cost, even if it is not absolutely better at it. Specialising and trading can raise what both can consume. The argument assumes resources can move into the advantaged industry, and it ignores transport costs and the wish to keep some production at home for security. Those limits belong in an evaluation.
The balance of trade is the value of visible exports minus the value of visible imports, goods you can see and count. The balance of payments is the wider account. It includes visibles, invisibles such as shipping and tourism, and capital flows. A country can have a deficit on visible trade and still have a surplus on the full account, or the reverse. Do not use the two names for the same thing.
What earns the marks
Comparative advantage is opportunity cost, not "we are better at it". That second phrase is absolute advantage. Balance of trade is visibles only. If you include tourism you have left the balance of trade. A deficit means imports of those items exceed exports. It is not, by itself, a judgment that the country is failing. The question has to ask for an effect before you give one.
Practice questions
These are practice questions in the style of the paper, with a model answer and a mark scheme. They are not a promise of what your paper will ask.
1Question 1
4 marks
(a) Define comparative advantage. (2 marks)
(b) State one limitation of the theory as a guide to real trade. (2 marks)
Model answer
(a) A country has a comparative advantage in a good when it can produce that good at a lower opportunity cost than another country.
(b) Transport costs may wipe out the gain, or countries may refuse to specialise fully because they want some domestic supply for security.
Mark scheme
Lower opportunity cost1 mark
Compared with another country1 mark
A real limitation, such as transport costs, barriers, or incomplete specialisation2 marks
2Question 2
4 marks
Distinguish between the balance of trade and the balance of payments. (4 marks)
Model answer
The balance of trade is visible exports minus visible imports. The balance of payments also includes invisible trade and capital flows. It is the wider record of transactions with the rest of the world.
Mark scheme
Balance of trade: goods, or visibles, only1 mark
Exports of goods minus imports of goods1 mark
Balance of payments is wider1 mark
It includes invisibles or capital, or both1 mark
3Question 3
2 marks
State two gains a country can get from international trade. (2 marks)
Model answer
It can obtain goods it cannot produce, and it can buy some goods more cheaply than it can make them.
Mark scheme
Access to goods not produced at home, or cheaper goods1 mark
A second gain, such as a larger market for its own producers, or economies of scale1 mark
Practise Economics with Anna
More questions on this topic are inside GLearn, marked as you answer, with the reason written out. The first ones need no account.
The ability to produce a good at a lower opportunity cost than another country. It is not the same as being able to produce more of it with the same resources. That is absolute advantage. Trade can still benefit both sides when each specialises where its opportunity cost is lower.
What is the difference between the balance of trade and the balance of payments?+
The balance of trade covers visible goods only: exports of goods minus imports of goods. The balance of payments is the full account with the rest of the world, including services such as tourism and capital flows. All WASSCE Economics past questions