2.2 Trade

Question 1

Trade balance

Answer 1

Net exports (X - M)

Question 2

Trade balance surplus

Answer 2

Value of exports exceeds value of imports (X > M)

Question 3

Trade balance deficit

Answer 3

Value of imports exceeds value of exports (X < M)

Question 4

Free trade agreeements

Answer 4

Designed to promote trade between countries. Facilitates trade and investment between two countries by reducing tariffs, improving market access and providing a framework for economic cooperation.

Question 5

Trade liberalisation

Answer 5

Removal or reduction of restrictions/barriers on free exchange of goods between nations. More of an ongoing process than a policy.

Question 6

Economies of scale

Answer 6

Refers to the cost advantages that a business can achieve by increasing its production scale. As volume of production rises, cost per unit output generally decreases.

Question 7

Tariffs

Answer 7

A tax placed on exports or imports

Question 8

Exports

Answer 8

A function of international trade whereby goods produced in one country are shipped to another country for future sale or trade in exchange for currency or other goods and services.

Question 9

Imports

Answer 9

Goods and services produced by foreign sector and purchased by the domestic economy. Requires an exchange of foreign currency or other goods and services and is a withdrawal in the flow of income.

Question 10

Trade balance

Answer 10

Indicates the value of exports less imports

Question 11

Trade openness

Answer 11

The extent a country is engaged in international trade. Measured by the ratio of the sum of exports and imports and GDP (ie. X-M/GDP)

Question 12

International trade

Answer 12

Exchange of goods and services, and financial and capital resources across national borders.

Question 13

Globalisation

Answer 13

Flow of goods and services, information, ideas, technology, capital and people across national borders. Creates more interconnected and interdependent world.

Question 14

Balance of Payments

Answer 14

Records and measures financial transactions between Australia and the rest of the world over a period of time. e.g. trade balance, income flows (dividends and interest), financial flows (taking out loans or buying assets), transfers such as foreign aid.

Question 15

Current account balance

Answer 15

Measures the flow of money across a country’s borders

Question 16

Net primary income

Answer 16

Value of all receipts of income from Australians holding foreign assets less all payments of income to foreigners who hold Australian assets.

Question 17

Net secondary incomes

Answer 17

One-way movements of money with nothing expected in return. e.g. overseas pension payment, transfer of money to overseas family.

Question 18

Balance on current account

Answer 18

Current account comprises of net income (net primary and secondary income) + trade balance (balance on goods/merchandise trade and balance on services)

Question 19

CaFA

Answer 19

The Capital and Financial Accounts complement the Current Account Balance

Question 20

Absolute advantage

Answer 20

The ability to produce more units of a good or service then another producer, using the same quantity of resources.

Question 21

Comparative advantage

Answer 21

The ability to produce a good or service at a lower opportunity cost then another producer (country).

Question 22

Factor endowments

Answer 22

Abundance in arable land allows comparative advantage in food production, highly skilled labour allows comparative advantage in financial services and technologies

Question 23

Levels of technology

Answer 23

High degree of specialisation in technology amongst developed countries (Japan, USA, Germany). Comparative advantage in capital intensive goods and high levels of research and development, large shares of scientists and engineers in the workforce.

Question 24

Importance of International Trade: Economic Growth

Answer 24

Expanding markets cause an increase in the scale of production. Access to a larger consumer base when countries engage in trade.

Question 25

Importance of International Trade: Resource Allocation and Efficiency

Answer 25

Allows specialisation in producing goods and services with comparative advantage. Efficient resource allocation leads to increases in productivity and overall benefits the global economy.

Question 26

Importance of International Trade: Innovation and Technology Transfer

Answer 26

Facilitates the flow of ideas, technologies, and innovations between countries. Accelerates advancements and promotes innovation.

Question 27

Benefits of free trade

Answer 27

More consumer choice, lower prices, ability to acquire needed resources, producers benefit from economies of scale, increased competition, efficient allocation of resources, a source of foreign currency, and diplomatic and cultural benefits.

Question 28

Costs of free trade

Answer 28

Structural unemployment, discourages the development of infant industries, challenges national security, and can cause global supply chain disruptions.