Free trade and protection Flashcards
What is the significance of international trade to the Australian economy?
The Australian economy has always relied on the international sector - not just for the sale and purchase of goods and services, but also for funds for investment. Historically, Australia has been a significant exporter of primary commodities, an importer of manufactured goods, and an importer of financial capital. This has meant that trade and foreign investment have played a major role in the economic development of the Australian economy.
Trade is important as it can expand a nations consumption possibilities by providing access to other countries production through imports. Exporting increases a nation’s production while importing increases consumption.
Around one-quarter of Australia’s income is sourced from exports and one in five jobs are linked to trade.
There is a strong link between trade and economic growth. The countries that have experienced the fastest growth rates in trade have also achieved high growth rates in per capita income growth.
What type of economy is Australia considered?
Traditionally, Australia has been described as a small open economy. The ‘small’ refers to the size of the economy in terms of both population and total production (GDP). But Australia can no longer be considered a small economy. Australia’s population has grown to over 26mil and Australia’s annual GDP is now over $2 trillion. It would be more correct to refer to Australia as a medium-sized open economy.
The ‘open’ means that the movement of goods, services, and capital is generally unrestricted, that is, they can freely move between Australia and the rest of the world. Protectionist policies such as the use of tariffs, subsidies, and quotas hamper the free movement of goods and services, and Australia has reduced its level of protection to domestic industry to an all-time low.
The gains from specialisation and trade
Nations trade because it is advantageous to do so. The exchange of G&S is a necessary characteristic of a specialised economy (Not possible without trade). Countries specialise in the production of certain goods and services to which they are best suited. Surplus production can then be exchanged or traded for other G&S.
International specialisation is made possible because of the uneven distribution and quality of resources between countries. Australia for example is well endowed with natural resources such as forests, minerals and energy supplies.
What is an absolute advantage?
A country is said to have an absolute advantage in the production of a good or service over another country if it can produce a greater quantity of that good with the same quantity of inputs.
What is comparative advantage?
When a country has an absolute advantage in the production of both goods, its comparative advantage lies where its absolute advantage is greatest. A country is said to have a comparative advantage in producing a good or service if it can produce that good or service at a lower opportunity cost than another country.
Draw a demand and supply model for exports
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Draw a demand and supply model for imports
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Sources of comparative advantage
Comparative advantage is determined by the quantity and quality of the nations human, natural and capital resources, and by technological progress.
Protection
Protection refers to any action by the government designed to give the domestic producer an artificial advantage over a foreign producer. Protective measures can be classified into three main types:
- those that increase the domestic price of the foreign product, such as tariffs
- those that provide domestic producers with a cost advantage, for example subsidies
- those that impose a quantitative restriction on imports such as quotas.
The goal of protection is to increase the domestic production in the protected industries and decrease the consumption of imported G&S
Costs and benefits of protection
Costs
-Industries given protection will consume resources that other industries could have used
- Other industries competitiveness will decrease due to having to import
- Consumers are disadvantaged as they will have to pay higher prices for both domestic and imported goods and the quantity of goods they can consume decreases. (Pay more get less)
Benefits
- owners and workers in the protected industry benefit
-sometimes government in the case of tariff revenue
The losses of protection always outweigh the gains
What are tariffs?
refers to a tax on an imported good. Most common. In Australia it has been imposed on motor vehicles, clothing and footwear.
- Designed to give domestic producers an advantage, and tax revenue for the government.
Tariffs distort resource allocation, net welfare loss for the economy,
The DWL has a multiplying effect on the entire economy.
Tariffs, while decreasing imports may actually result in lower exports resulting in a net decrease in employment.
What are subsidies
Subsidies- Refers to grants and payments made by the government to domestic producers.
Directly lowers the cost of production, leading to lower prices, consumers pay the same price, with no adverse effects to them.
Subsidies impose an indirect burden in that the cost of the subsidy is paid from government revenue.
-The revenue used is an opportunity cost.
-Distorts resource allocation and doesn’t let firms evolve to be naturally efficient. Area 5 is a DWL.
What are the arguments for protection?
Arguments for protection
- The antidumping argument.
- A practice where a company exports a products at a lower price than it would normally charge within their home market, used to drive out competition with domestic firms.
- However it is hard to prove, if I can be proven then it is reasonable to have protection. - The infant industry argument
- Argued that a new industry needs protection in their infancy, until they mature and take advantage of their economies of scale.
- However it ends up being more long term than intended, and it grows a dependency not allowing the industry to naturally innovate and develop. - The diversification argument.
- The idea in which specialisation is like ‘placing all eggs in one basket’, so protection is placed in order to develop a country’s industrial base and be more competitive in the long run.
- However all countries have a larger variety of good in which they specialise in, ‘there is more than one basket’, Economies are dynamic and will naturally evolve depending on forces o f supply and demand, governments shouldn’t be predicting the future. - The national security argument.
- The protect vital industries in case of a wartime emergency
- Outdated argument, and all industries can argue they are vital. Protectionism is a positive feedback loop. - The increase employment argument.
- Shifting consumer spending on a domestic industry would increase domestic employment.
- However the production cost would rise leading to a trickle down affect on other induesties, the loss of employment outside of the protected industry can occur. - The cheap foreign labour argument.
- Argued domestic industries need to be protected from places where wages are lower
- This argument can go both ways, level of wages is a function of productivity, we should take advantage of importing the labour intensive goods and focus in more difficult goods. - The favourable balance of trade argument
- Argued that the trade deficit should be eliminated by reducing imports.
- A trade deficit is not a bad thing, and protection whill reduce exports aswell. X & M brings gains to the economy and we should aim to increase both.
What is trade liberalisation and how does it relate to the WTO
Trade liberalisation refers to the removing or reducing of any restrictions which limit the trade in goods and services. The WTO is like the referee of world trade. With the goals of reducing protectionism and agreeing on the rules of trade. Promoting multilateralism.
Arguments for trade liberalisation
- Based on the theory of comparative advantage. Trade -> Economic Growth
- Specialisation results in a higher level on real income, greater consumption and higher living standards.
- Increases efficiency through greater consumption.
- Increases productivity through resource allocation.
- Consumers and producers gain through market access.
