3.4 International trade Flashcards
What is trade?
involves the buying and selling of goods and services across international boundaries.
What are imports?
goods and services produced by and bought from other countries
What are exports?
goods and services produced domestically and sold to buyers abroad
What is free trade?
defined as the absence of government intervention of any kind in international trade, so that trade takes place without any restrictions (or barriers) between individuals or firms in different countries.
What are the benefits of free trade between countries?
- Increased competition
- Specialisation
- Greater choice for consumers
- Increased flow of new ideas and technology
how does increased competition lead to lower prices and higher quality?
When countries trade with each other, domestic firms become exposed to competition from products produced by firms in other countries. They are therefore forced to become more efficient; in other words, they must try to produce at the lowest possible cost. This leads to lower prices for consumers.
How does trade make the flow of new ideas and technology possible?
As goods and services flow from one country to another, they enable new ideas and new technologies and skills to be transferred from one country to another. Australia has access to all the latest software, machinery, education, and innovations as a result of free trade.
how does trade lead to greater choice for consumers?
The goods and services each country can produce differ widely with respect to their variety and their quality. By trading with each other, countries can import a larger variety of goods and services, possibly of higher quality, than the ones they can produce themselves. This increases choice for consumers.
How does trade enable specialisation?
Specialisation occurs when a country concentrates production on one or a few goods and services it can produce efficiently (at a low cost). A country that does not trade must itself produce all the goods and services consumed, and therefore cannot specialise. However, if a country uses its scarce resources to specialise in the production of those goods and services it is most efficient at producing, it can produce more of these, and trade some of them for other goods produced more efficiently in other countries.
What is absolute advantage?
the ability of one country to produce a good using fewer resources than another country. Putting it differently, a country has an absolute advantage in a good if with the same quantity of resources, it can produce more of the good than another country. The ability to specialise ensures this.
What is the theory of absolute advantage?
if countries specialise in and export the good in which they have an absolute advantage (can produce with fewer resources), the result is increased production and consumption in each country, increasing material living standards in each country.
What are the potential negatives of free trade?
- Increased unemployment
- ‘Infant’ domestic industries cannot develop
- Predatory pricing
- Loss of culture
How does free trade lead to increased unemployment?
By allowing free trade, it increases competition in the economy, which forces businesses to try to produce at the lowest cost possible. It is in the process of trying to lower production costs and be more efficient business:
- Replace labour with capital (machinery)
- Outsource labour to overseas countries with lower wages
Furthermore, there are many instances where domestic firms cannot compete and are forced to shut down. In all three cases there would be an increase in unemployment in Australia.
How does free trade mean infant industries cannot develop?
An ‘infant’ industry is one that is in its early stages of development. There are times when a nation might be in the process of developing a robust and world-class industry, but by allowing foreign competition that is already producing at a lower cost and higher quality, it might lead to the discontinuation of these industries before they have a chance to ‘compete’ with the world.
How does free trade lead to predatory pricing?
Predatory pricing is the pricing of goods or services at such a low level that other firms cannot compete and are forced to leave the market. Sometimes firms will even operate at a loss to keep their prices low just to eliminate competition.
