Free trade and protection Flashcards
Australia’s imports and exports
Australia is an exporter of primary commodities (minerals and agricultural products) and an importer of manufactured goods as well as financial capital
What is Australia’s GDP
Around $1.6 trillion
We are also now the 12th largest economy
Why is trade important? (IMPORTS)
- It can expand a nation’S consumption possibilities by providing access to other countries production through imports.
- Increase standard of living
- importing allows Australian households to consume goods and services that are either not produced in Australia or are too costly to produce
Why is trade important (EXPORTS)
- A country gains when it exports good it can produce at a relatively low cost and import goods it produces at a relatively high cost
- exporting pays for the imports a country needs to enjoy a high standard of living
- Exporting enables Australian firms to produce for the world market
What does engaging in trade permit
increased specialisation, economies of scale, increased productivity and higher real incomes
Stats for trade in Australia
- In 1970, exports and imports each accounted for around 13% of Australia’s GDP. By 2014, exports and imports had increased to over 20% of GDP
- One in five jobs are directly linked to trade
- Australia accounts for just 1.3% of global exports, compared to China who accounts for 11%
A countries level of exports are determined by
- The size and structure of the economy
- Its relative competitiveness
- Its location
What is the trade openness ratio
measures the average value of exports and imports as a percentage of GDP
Formula for trade openness
{½ (X+M)/GDP} × 100
How has Australia’s trade intensity increased?
from 13% in 1970 to 21% by 2013
Why is our trade intensity relatively low compared to European countries
European countries have a relatively high trade intensity due to the ease of trading within the euro zone
Why do the USA and Japan have lower trade to GDP ratios
- This is due to the enormous size of their economies, as they do not need to rely on trade as much as smaller economies, such as Australia
- Australia’s domestic competition is so strong that we need to produce for the world market in order to gain the same benefits of competition
What is the purpose of economic growth
To enable a high level of consumption and high standard of living
What are the main parts to international trade?
Specialization and exchange
What makes international specialisation possible?
The uneven distribution and quality of resources between countries
What happens if production costs differ?
how do countries benefit?
Then countries will benefit by specialising in the good and service in which they are most efficient, exporting the surplus and importing those goods in which they are least efficient
What is absolute advantage?
A country has an absolute advantage in the production of a good over another country if it can produce that good more efficiently than the other country
What does more efficiently refer to?
Using less resources to produce a given quantity of output; or to produce more output from a given quantity of resources
What are the assumptions of the model
- The world consists of two countries
- Each country produces and consumes two goods
- Resources are perfectly mobile
- If trade takes place, there are no transportation costs
What is comparative advantage?
A country is said to have a comparative advantage in the production of one good over another country, if the opportunity cost of producing that good is lower than the other country.
What is opportunity cost?
The value of the alternative product foregone
How do countries gain based on comparative advantage?
If they specialise based on their comparative advantage and then trade their surplus production
What happens when the domestic price is lower than the world price?
- The country is more efficient at producing the good than the rest of the world
- Has a comparative advantage
- Should therefore export it
What happens when the domestic price of a good is higher than the world price?
- The country does not have a comparative advantage
- They are not very efficient at producing the good
- This means that the rest of the world is relatively more cost efficient at producing the good
- Therefore, the country should import it
What is protection?
Refers to any action by the government designed to give the domestic producer an artificial advantage over a foreign producer
Three types of protection?
- Tariffs: increase the domestic price of the foreign product
- Subsidies: provide domestic producers with a cost advantage
- Quotas: quantitative restrictions on imports
What is the goal of protection?
To increase domestic production in the protected industries and decrease consumption of imported goods and services
Who benefits from protection?
- The owners and workers in the protected industries.
- The government occasionally benefits in the case of a tariff
How does protection impose a cost burden on society?
- Industries given protection will expand and consume resources that other industries could have used
- These industries who are unprotected are disadvantaged, as they may also have to pay higher prices for imported capital.
- This therefore, reduces their competitiveness
- Decreases exports, as imported capital becomes more expensive
- consumers pay more but receive less
ALL FORMS OF PROTECTION RESULT IN A NET WELFARE LOSS FOR THE ECONOMY
- the losses outweigh the gains
What is a tariff?
- A tax placed on an import
- Tariffs are designed to increase the price of a foreign good or service so that the competing domestic good receives a price benefit
- Tariffs are also important in creating government revenue
What happens when an tariff is put in place?
- Less imports will be sold on the domestic market, and they will be sold at a higher price
- Higher prices= benefit domestic producer as they are abler to compete more favourably against the imports
- Domestic production expands (Q1 to Q3) as producers are now able to supply more at a higher price.
- Consumption of foreign goods contracts (Q2 to Q4) and imports are reduced to between Q3 and Q4
- Areas e + f reflect a dead weight loss as this is the lost consumer surplus
- The total surplus as a whole is reduced whenever a tariff is imposed