Free Trade and Protection

Question 1

what are 5 assumptions of comparative advantage models

Answer 1

1. Two countries
2. Each countries produces and consumes two goods
3. Both countries have equal factor endowments
4. Resources are fully employed
5. There are constant returns to scale.

Question 2

What is the significance of trade for the Australian economy (e.g proportion of GDP and employment, linked to trade)

Answer 2

• Australia relies on the international economy for trade and investment.
• Historically Australia has been a great exporter of primary commodities, an importer of manufactured goods and an importer of financial capital.
• Australia is no longer a small economy with a population of over 24 million and Australia’s annual GDP being around $1.7 trillion.
• Australia has the world’s 13th largest economy making it accurately termed as a medium sized open economy.
• The open means that the movement of goods and services and capital is generally unrestricted, that is, they can move freely between Australia and the rest of the world.
• Protectionist policies such as tariffs, subsidies and quotas hamper the free movement of goods and services, and Australia reduced its level of protection to domestic industry to historically low levels.
• Trade is important because it can expand a nation’s consumption possibilities by providing access to other countries’ production through imports.
• International trade accounts for 13 % of Australia’s GDP in 1970 and in 2016 they had increased to over 20%
• This means that around 1/5 of Australia’s income is sourced from exports and that 1 in five jobs is directly linked to trade.
(be able to list at least 5)

Question 3

what are the sources of comparative advantage?

Answer 3

• Natural resource (Australia specializes in iron ore)
• Labour resources (Switzerland specializes in banking services)
• Capital resources (US specializes in software)

Question 4

What are the gains from specialization and trade?

Answer 4

• Exchanging for goods that are lacking in your country for goods that are plentiful but lacking other countries
• Exchange of skills to ensure relative efficiency and the greatest opportunity cost.
• Higher standards of living

Question 5

Long term arguments for protection/ advantages

Answer 5

• Protecting infant industries
• Protecting employment
• Protecting against dumping of imports
• Terms of trade
• Reducing a balance of payments deficit
• Diversification
• Foreign Investment

Question 6

What are the types of protection:

Answer 6

tariffs, import quotas, subsidies

Question 7

What are some non-tariff barriers

Answer 7

• Restrictions of foreign investment
• Local content rules
• Biosecurity and quarantine barriers
• Restrictions on recognition of professional qualifications
• Patents and copyright
• Voluntary export constraint
• Customs duty

Question 8

What is trade liberalisation

Answer 8

• Trade liberalisation is the opposite of protection. Liberalising trade is achieved by removing or reducing any restrictions which lintie trade in goods and services .

Question 9

What are the roles of the World Trade Organisation?

Answer 9

• The WTO is the only prganisation dealing with the rules of trade between nations.
• The WTO promotes trade liberalisation by helping to lower trade barriers and discouraging ‘unfair’ practices such as export subsidies.

Question 10

What are the three types of free trade agreements?

Answer 10

Multilateral: a FTA between 3 or more countries
Bilateral: an FTA between 2 countries
Regional: an FTA between countries within a certain region

Question 11

What is the definition of a tariff?

Answer 11

a tax on imports designed to give domestic producers a competitive advantage

Question 12

What are the effects of adding a tariff

Answer 12

Reduces imports, protects domestic industry and jobs, raises revenue, consumer loss (higher price less consumed), less c,o,y, inflation – higher cost of intermediate imported goods, low exports – higher costs, retaliation, government can use revenue on social overhead capital

Question 13

Negatives of protection

Answer 13

• Decreased variety of good for consumers
• Higher prices on imports
• Decreased number of trading partners

Question 14

definition of a subsidy

Answer 14

Subsidies consist of financial assistance provided by government to some Australian producers competing with imports, allowing them reduce the price at which they sell their products. Reduces cost of production and shifts supply curve to the right

Question 15

The effects of a subsidy

Answer 15

• Imports, domestic industry and jobs, cost to government
• Revenue effects – government loss, producer gain, consumer no loss
• Redistribution effects (Y) – government and producers
• Protection effects
• Consumption
• Government can use revenue on social overhead capital

Question 16

Tariffs versus subsidies

Answer 16

• Tariffs raise price (inflationary) while subsidies do not
• Tariffs reduce purchasing power, subsidies do not
• Tariffs raise revenue which can be used by government, subsidies use public money and create an opportunity cost
• Subsidies are more open and less likely to result in retaliation as it does not increase price of imports.
• Tariffs – user pays, subsidies – all tax payers pay
• Subsidies are short term and easy to remove. As an expenditure item they are more likely to be reviewed.

Question 17

Arguments for subsidies/protection

Answer 17

• Foreign Investment
• Protection of employment
• Improved terms of trade
• Reducing a current account deficit
• Diversification
• Protection of infant industries
• Protection against the dumping of imports

Question 18

What’s the difference between the composition and direction of trade?

Answer 18

The composition of trade = what we trade

the direction of trade = who we export/import to/from