Chapter 3: Australia and the World Economy Flashcards
What is trade liberalisation?
Government policy which involves reducing protection of local industries by cutting tariffs, subsidies and import quotas and signing FTAs.
What is free trade?
Involves abolishing protection of the local industry by removing tariffs, subsidies and import quotas, fording local firms to become more internationally competitive.
Describe the key features of trade liberalisation
Cutting tariffs makes imports cheaper
Reducing subsidies paid to local forms creates equal footing between local and overseas businesses
Abolishing import quotes = higher quantity enter country
Signing more bilateral Free Trade Agreements (FTAs) =
What is trade protection?
Government policy which involves increasing protection for local industries by increasing tariffs, subsidies import quotas to increase their international competitiveness.
What the benefits of trade for living standards?
What is international specialisation?
When countries only allocate resources to areas of production in which they have a comparative cost advantage.
How does trade encourage international specialisation and thus improve material living standards?
Freer trade encourages economies to produce what they can most efficiently produce = can sell this production as exports = get money in return = use money to pay for imports that are too expensive to produce locally = households can access cheaper imports to satisfy more needs and wants, this would otherwise not be possible as higher production costs would be passed onto consumers, restricting their consumption levels = higher world output, incomes, purchasing power and material living standards.
What types of advantage can specialisation in production be based on?
Absolute cost advantage
Comparative cost advantage
What is an absolute cost advantage?
When a nation is the cheapest/most efficient producer of a single good or service in the world
What is a comparative cost advantage?
When a nation specialises in a few key areas of production where its cost advantages are greatest and its cost disadvantages/opportunity costs are lowest.
resources being allocated most efficiently and oc minimised = can work on PPF = full employment + higher incomes + higher material living standards
What are economies of large-scale production
When more units of a good or service can be produced on a larger scale with (on average) fewer input costs.
How does trade promote economies of large-scale production and lift material living standards?
Trade encourages specialisation = output maximised as firms producing goods/services where they have comparative cost advantage = firms likely to grow and produce on larger-scale = lower production costs = lower average market prices = higher purchasing power = higher consumption levels and material living standards.
How does trade help lower prices for consumers to improve material living standards?
Providing access to cheapest suppliers, broadening selection of goods/services, reduces consumer’s dependence on single firm
Increasing level of competition encourages international specialisation, boosting productivity and efficiency and creating economies of large-scale. This reduces costs for per unit of production, lowering market prices and inflation
Reducing market power makes businesses price takers, forcing them to price products competitively, lowering inflationary pressures
Increasing wage competition from low-wage countries, meaning firms can incur lower production costs without foregoing sales due to high tariffs, enabling them to sell goods/services more cheaply and competitively
How does trade boost GDP and incomes, improving material living standards?
Trade encourages specialisation in areas where there is a comparative cost advantage = boosting efficiency & minimising opportunity costs = growing productive capacity = growing potential GDP, employment, average incomes, consumption levels and material living standards
Promotes economies of large-scale = boosts efficiency + profitability + expansion of businesses = growing productive capacity = growing potential GDP, employment, average incomes, consumption levels and material living standards
Creates stronger global competition = firms encouraged to innovate to lower costs and grow technical efficiency = growing productive capacity = growing potential GDP, employment, average incomes, consumption levels and material living standards
Trade facilitates imports of capital goods = growing productive capacity = growing potential GDP, employment, average incomes, consumption levels and material living standards
How does trade boost levels of employment and improve material living standards?
LONG-TERM
Boosts efficiency + lowers production costs + increases availability of resources (ACE) = strengthens business profitability and expansion (more able and willing to produce) = firms increase demand for labour = lower unemployment and higher average incomes
SHORT-TERM
Uncompetitive firms may close down + relocate to low-wage countries + restructure production by using tech which makes some jobs obsolete = higher structural unemployment = temporary fall in material/non-material living standards
How does trade enable access to more resources, improving material living standards?
Enables access to resources & goods/services that country lacks or cannot produce itself at lowest possible price = increased availability of resources (ACE) = firms more able and willing to produce and expand = growing productive capacity = boosting GDP, employment, average income and consumption levels (higher MLS) = boosts government revenue through taxation = enabling production of public goods + infrastructure = higher MLS and NMLS
How does trade increase consumer choice, improving general living standards?
Freer access to imports as well as locally produced g/s = increases extent to which wants can be satisfied = facilitates higher consumption levels and higher quantity/quality of goods available for consumption (rise in MLS) + more wants satisfied, making life more enjoyable (rise in NMLS)
