Free Trade and Protection Flashcards
why is free trade important
higher rates of income growth per capita
how have exports as a percentage of GDP increased 1990 to 2020
15% of GDP = exports
24% of GDP = exports
how can countries gain from specialisation
the income they earn from surplus production is used to purchase g/s that require but do not produce themselves
how is international specialisation made possibl
Uneven distribution and quality of resources between countries
what is specialisation
producing only one product, the one you are most efficient at
what is 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 or the same quantity of output with fewer inputs
what is op cost
the ratio of producing one unit of good to producing one unit of the other
what is comparative advantage
if it can produce a good or service at a lower op cost than another country
when does a country have CA in producing a good (3)
AA in production of both goods = CA where AA is greatest
No AA = CA were abosolute disadvantage is smallest
AA in both = CA where lowest op cost
what are the sources of comparative adv (what determines it)
determined by quantity and quality of resources (natural, labour capital)
DRAW GAIN FROM EXPORTS GRAPH WITH SURPLUS STUFF
when does a country gain from exports
If domestic price of producing a good < world price = country is relatively more efficient, it has a lower opportunity cost or a comparative advantage
DRAW GAIN FROM IMPORTS GRAPH WITH SURPLUS STUFF
when does a country gain from imports
Domestic price > world price = country doesn’t have comparative advantage of producing a goods, the world is more cost efficient`
what is ‘protection’
Any action by government designed to give the domestic producer an artificial advantage over a foreign producer by increasing domestic production and decreases import consumption: tariffs, subsidies and quotas (quantitative restrictions on imports)
what 2 groups lose from protection (there is net welfare loss)
- unprotected industries - no resources so have to import expensive
- consumers pay more for domestic and imported goods
what is a tariff
DRAW TARIFF DIAGRAM
a tax placed on an import designed to increase the price of foreign goods and services so domestic goods receive price benefit
what is a subsidy
DRAW SUBSIDY DIAG
grants or payments made by the government to domestic producers which directly lowers a producer’s costs of production
what are the 7 agruments for protection (briefly explain)
- antidumping - exports good at lower price to get rid of stock
- infant industry - new businesses need protection
- diversification - not placing all eggs into one basket
- national security - protect indsutries vital to econ incase of war
- increased employment - in protected industry (more domestic demand)
- cheap foreign labour - fast fashion
- favourable BOP - trade deficit could be eliminated
what is the most favourable nation principle
if one country improves benefits for one trading partner it must do the same for all WTO members
what is the national treatment principle
imported goods and services should be treated the same as domestic - no descrimination
what is a free trade agreemnent and what is a bilateral agreement
treaty between 2 or more economies that reduce of eliminate certain barriers to trade
what is a trade bloc
group of countries that agree to reduce trade barriers between themselves but impose those barriers on oustide countries (EU, NAFTA)
what is trade diversion
when trade is diverted from a low cost producer outside the trade agreement to a higher cost producer within the group
how many FTAs does aus have
14 with 20 countries
