Economics Unit 3 Flashcards
Why do nations trade?
-Unequal distribution of natural resources e.g. Saudi & their oil.
-unequal distribution of capital and technology
-unequal distribution of human skills
-desire for improved standard of living
-profit motive
How do nations trade?
Through the use of each nation’s currency
Specialisation
When an entity focuses on the production of limited scope of goods to gain a greater degree of efficiency.
Cost of specialisation and trade
-Domestic jobs are lost
-Domestic income is lost
-National security
-Nation’s “dumping” of goods trying to drive out domestic competition.
-Other nations don’t treat their workers fairly.
Factor endowment
Amount of land, labour, capital, and entrepreneurship a country possess and can exploit for manufacturing. Countries with large endowment of resources tend to be more prosperous than those with small endowment if all other things are equal.
Absolute advantage
Ability of nation to produce commodities more efficiently than another nation.
Comparative advantage
is an economy’s ability to produce a particular commodity at a lower opportunity cost than its trading partners.
Complexities of International trade
-different currencies
-different cost structures
-social differences
-technical differences
-Different national policies
-Multinational corporations
Different cost structure
-Labour-capital mix
-Size of domestic market
-transport cost
Composition
what is being traded
Direction
where the goods are being traded to
Groups affected by International trade
Domestic consumers
Domestic sellers
Economic growth & standard of living
Third Parties
Two -way trade
International trade in which countries import and export the same or similar goods
Trade Intensity
-sum of export and import over GDP
-Measures an economy’s integration with the world economy
- A higher trade intensity means an economy is more susceptible to external shocks in the world
Trade bloc
an intergovernmental agreement where barriers to trade are reduced or eliminated among participating states
Trade Liberation
removing or reducing trade barriers
Bi-lateral trade agreements
Between two countries
Multilateral trade agreements
Between multiple countries
World trade organisations
- World Trade Organisation (WTO)
- European Union (EU)
- African Union (AU)
- Asia Pacific Economic Cooperation (APEC)
Deregulation
-Easier to invest overseas
-Buying & selling government bonds more effective
-Floated the Australian dollar
Terms of Trade
A statistical concept that highlights the relationship between export prices & import prices
formula for terms of trade
General price of export price/general price import price
Formula of trade index
export price index/import index X 100%
opportunity cost formula
what is given up/what is gained
opportunity cost
the loss of other alternatives when one alternative is chosen
competitive advantage
trade advantage obtained through the capacity of a nation’s industries to innovate and upgrade.
the components of competitive advantage
factor conditions
demand conditions
related & supporting industries
firm strategy, structure & rivalry
The law of one price
predicts that the price of the similar products should converge to the one price.
used to measure the degree of economic integration
What is driving globalisation
Freer trade
more efficient transport
increased capital mobility
new technology
standard of living
Why do MNC’s want to take advantage of Globalisation
-Help minimise labour costs
-increase access to natural resources
-Help firms gain economies of large-scale production
-takes advantage of favourable government policies
-increases flexibility in business decision making
Exchange rate
The no. of units of a currency received when it is compared for another currency.
ChAFTA
Australia-China trade agreement
Types of exchange rates
Fixed
Floating (dirty)
Managed (dirty float)
Effects on appreciation
-Lower net exports
-domestic g&s become internationally uncompetitive
-imports become cheap
-imports cheaper- so inputs become cheaper.
Effects of depreciation
-greater net exports
-domestic g&s internationally competitive
-imports become more expensive
-more expensive imports means that cost of inputs become more expensive.
what causes movements of demand for currency
-overseas economic activity
-consumer confidence
-export commodity prices
-productivity & competitiveness
-speculation
-interest rate differentials
-earning overseas
-relative inflation
