Free Trade/Protection Flashcards
What is the significance of trade?
- Aus can X to a large market (world pop.).
- X of g/s pay for M we can’t produce ourselves.
- Trade permits specialisation - increased productivity, real Y - economic growth.
Why do we trade?
Specialisation and g/s exchange are necessary for developing economies.
Why should nations trade surplus production?
- Different resource endowments that affect availability, cost, quality of products produced.
- Relative production efficiencies developed overtime - favour specialisation over self-sufficiency.
- Political/strategic benefits may result from trade.
What is Comparative Advantage?
When one country can produce a g/s at a lower opportunity cost than another country.
Bats Balls
India. 4 8
Thailand 10 10
- When India produces 1 bat they give up 2 balls, but when they produce one ball they only give up 0.5 bats (low OC).
India specialise in balls - Thailand has an absolute advantage in both goods.
Both countries negotiate favourable TOT over the domestic TOT.
0.5 Balls > x > 1 Bat
What is absolute advantage?
When a country has an advantage in the production of a good over another country.
Being able to produce the good more efficiently regarding use of resources and output.
In the CA example, Thailand has AA as the production/OC for bats and balls are the same.
What does Protection refer to and the three forms?
What countries employ to restrict international trade - referring to any gov. action designed to give the domestic producer an advantage over a foreign producer.
- Subsidies, tariffs, quantity restrictions (quotas).
Outline what tariffs are.
Taxes applied to imported goods - making them more expensive for domestic consumption.
Domestic price of similar good < Price of foreign good.
Creating injection into the economy - increasing gov. revenue.
Outline what subsidies are.
Grants/payments made by the gov. (from tax revenue) to domestic producers - lowering the price of production, enabling domestic producers to sell at a lower price - over their competitive importers.
Outline what quantity restriction (quotas) are.
A gov. imposed trade restriction - limiting the number of imports we receive in order to maintain a certain price level - enabling domestic producers to remain competitive.
Outline arguments related to Protection.
Arguing for free trade on comparative advantage.
1) Diversification of comparative specialisation - placing eggs in one basket - producing in a narrow range of products - if all resources were employed in this and there were to be changed in world d/p - significant impact on the economy.
2) Anti-dumping - company X’s a product at a P < P home market; they are dumping - drives out domestic producers. These companies are big enough to take sustained short-run losses. Increase price in the long run - protection laws (quotas) to deter this.
3) Increased Employment - protection leading to higher spending into domestic production will increase protected employment - but companies relying on protected industries product as an input will rise in cost - thus lower their employment.
What is Trade Liberalisation and the WTO?
Opposite of protection - promote global trade by lowering barriers/restrictions (protection policies) - carried out by the WTO - offering a system for international commerce.
What are some arguments for Trade Liberalisation?
Increase real Y and SOL - Greater efficiency via. greater competition - Consumer gain from lower P - Dom. producers gain from lower input P - X’s gain from higher prices (increased market accessibility).
