ATAR Unit 3 (1) Flashcards
open economy
nation that trades with other nations
three countries that import the most in the world
united states of america [#1]
china [#2]
germany [#3]
three countries that export the most in the world
china [#1]
united states of america [#2]
germany [#3]
what if australia did not trade ?
no imports - less choice for consumers
no exports - decreased employment & economic growth
no competition - higher prices for consumers
shortages & surpluses of products
inefficiency - underemployment of resources
decreased gdp
contracted economy
why is trade important for an economy ?
access to imports - increased consumer satisfaction & standard of living
markets for exports - increased employment & economic growth
specialization - increased output
promotes economies of scale
sectors of the circular flow model impacted by trade
foreign sector
businesses
households
trade surplus
exports are greater than imports; therefore, prima facie, the economy should expand
trade equilibrium
exports are equal to imports; therefore, prima facie, the economy should remain constant
trade deficit
imports are greater than exports; therefore, prima facie, the economy should contract
why do nations trade ?
supplement a nation’s own resources
compensate for differing factor endowments : unequal distribution of natural resources, human skills, capital & technology
desire for an improved standard of living
profit motive
factor endowment
supply of factors of production that exists in a country
standard of living
measure of lifestyle standards based on material & quantitative indicators [e.g. education, income, health]
internal balance
state of the economy in which there is full employment & acceptable rates of inflation
widening gap
increasing economic difference between poor nations & economically advanced nations
stakeholders positively impacted by international trade
economy; consumers; workers; businesses; exporters; government
economy - economic growth
consumers - more variety & lower prices
workers - job opportunities
businesses - imported capital & incentive to compete
exporters - economies of scale
government - more taxes
stakeholders negatively impacted by international trade
workers & businesses
workers & businesses - unemployment if businesses cannot compete with foreign competition
multi-national corporation
enterprise operating in several countries but managed from one home country
transfer price
price charged for goods between two subsidiaries of one multi-national corporation located in different countries
complexity of international trade
different currencies have different purchasing powers & levels of inflation
different cost structures have different methods of production, different domestic market sizes & different transport costs
different social & technical aspects have different languages, customs, habits, tastes & requirements
different government policies have different motives for personal profit & welfare leading to inequality
sustainable economic growth
rate of growth that increases production, income & consumption; thus, current & future standards of living
full employment
socially acceptable rate of unemployment; everyone who wants a job has a job
price stability
little variation in prices & minimal inflation
sustainable development
rate of growth that cares for the environment & future generations
internal stability
state of the economy where there is full employment & price stability
external stability
state of the economy where financial obligations with the rest of the world are met through government policy measures
equitable distribution of income & wealth
fair distribution & allocation of income, tax & welfare
composition of trade
what we trade
direction of trade
where & with whom we trade
primary products
products w. minimal to no processing [e.g. agriculture]
simply transformed manufactures
basic intermediate manufactured products used as inputs for other goods [e.g. chemicals]
minimal price mark-up
elaborately transformed manufactures
vast range of finished products [e.g. machinery]
high price mark-up & more jobs
australia’s imports & exports
imports stm’s & etm’s [e.g. telecommunications equipment & vehicles]
exports primary products [e.g. iron ore & coal]
why have resource exports increased ?
resource production & resource price has increased significantly [supply]
china has been a key importer / buyer of australian resources [demand]
why have manufacturing exports not increased as much as resource exports ?
small population - cannot achieve economies of scale
isolation - high transport costs
wages - high production costs
australia’s direction of trade
great britain used to be australia’s main trading partner
australia’s trade is becoming increasingly asian-oriented
direction of australia’s free trade agreements
australia trades where profit lies
australia’s free trade agreements are becoming increasingly asian-orientated [e.g. ChAFTA, ASEAN]
most important driver of trade
political ties - a stability perspective [morals & trust]
geographical proximity - a cost perspective [transport distance]
percentage change expression
(new - old) / (old x 100)
opportunity cost expression
(give up) / (gain)
absolute advantage
ability of a nation to produce commodities more efficiently [lower resource cost] than another nation
comparative advantage
ability of a nation to produce commodities at a lower opportunity cost of production than another nation
adam smith’s theory
absolute advantage is producing more of a commodity than another producer using the same quantity of resources [i.e. lower direct resource cost]
only nations with absolute advantage in separate commodities should specialize & trade
david ricardo’s theory
comparative advantage is producing at a lower opportunity cost than another producer
nations may still benefit through specialization & trade even if a producer has absolute advantage in both commodities
nations should specialize in & trade the commodity where they produce at the lowest opportunity cost
assumptions of absolute & comparative advantage
two countries producing two commodities
fixed technology
mobile resources between two commodities
no transport costs
heckscher–ohlin theory of trade
composition & direction of trade is based on factor endowments
nations export commodities they have large factor endowments for
nations import commodities they have small factor endowments for
competitive advantage
ability of a nation’s industries to innovate & upgrade
michael porter’s theory
a nation’s prosperity relies on its industries’ ability to be innovative & upgrade to adopt technology
diamond of national advantage
factor conditions - advantage in factors of production [e.g. infrastructure investment / specialized workforce training]
demand conditions - developed domestic market [clear view of consumer demand to help anticipate international market needs]
related & supporting industries - efficient & internationally competitive supplier industries
firm strategy, structure & rivalry - company creation, management & domestic rivalry need to be disciplined, flexible & conducive to innovation
globalization
growing integration of national economies to form a single interdependent global economy
globalization positives
economies of scale [decreased costs / prices]
freedom of trade [more choice]
improved communication [increased welfare]
globalization negatives
widening gap between the rich & the poor [equity]
local businesses cannot compete [due to MNC’s EoS]
environmental harm
how to measure globalization ?
trade intensity - ratio of trade to GDP
law of one price - commodities converge to one price [e.g. gold]
trade intensity expression
(new - old) / (old x 100)
multi-national corporation characteristics
25% of revenue generated from operations outside parent country
headquarters located in parent country
offices, branches, workers, etc… in host countries
why do multi-national corporations exist ?
90% of global demand is not met by local supply
lower prices from economies of scale [supply chains]
what is important for multi-national corporations to be successful ?
location of natural factor endowments - source of resources to produce [e.g. low-cost labour]
digital & other innovation - internet reduces costs by cutting out the middle-man [retailers]
infrastructure integration including logistics - efficient process of getting product from source to consumer
government incentives - financial [grants & loans], fiscal [lower tax rates], other incentives [free trade zones]
what is important for multi-national corporations to be successful ? [link to trade theory]
location of natural factor endowments - heckscher–ohlin theory of trade [factor endowments]; ricardo’s theory [lower opportunity cost]; smith’s theory [lower direct resource cost]
digital & other innovation - porter’s theory [improved factor conditions / related & supporting industries]
infrastructure integration including logistics - porter’s theory [improved factor conditions / related & supporting industries]
government incentives - porter’s theory [improved demand conditions / firm strategy, structure & rivalry]; ricardo’s theory [lower opportunity cost]; smith’s theory [lower direct resource cost]
world trade organization [who, members, role, goal]
only global organization dealing w. the rules of trade between nations [est. Geneva, 1995]
164 members states [including australia]
promote free trade; police trade agreements; mediate trade disputes; impose trade sanctions
ensure that trade flows smoothly, predictably & freely
world trade organization [arguments for]
joseph stiglitz:
represents a rules-based global economic system
importance of rules to govern relations
multi-lateral system where everyone works together
importance of shared prosperity
world trade organization [arguments against]
donald trump:
america is disadvantaged in trade deals [e.g. NAFTA]
china grew w. the backing of the WTO
america loses all its cases w. the WTO
unfair to america
international monetary fund [who, members, role, goal]
organization working to foster global monetary cooperation & secure financial stability
189 countries [including australia]
economic surveillance & reporting; provide loans; stabilize currencies; restore conditions for strong economic growth; work w. governments to modernize economic policies & institutions to improve economic growth & create jobs
ensure the stability of the system of exchange rates & international payments that enable countries to transact w. each other
the world bank [who, members, role, goal]
organization comprised of five institutions
189 member countries [including australia]
provide technical & financial assistance to developing countries; end extreme poverty; increase the income of the poor
end extreme poverty & promote shared prosperity in a sustainable way
