Topic 1 Flashcards
Define open and closed economies
Open economy - has the five sector model economy, as they have international trade
Closed economy - only has a four sector model, do not internationally trade
What happens in an open economy
Means more than trading with other countries
Means free trade - gets rid of trade barriers that make
trade hard. For example, protectionism (i.e., tariff taxation and quoters)
What are the advantages of international trade?
Consumer advantage:
- greater choice/ variety of goods and services, lower prices as result of more competition
- benefit from lower prices providing a higher standard of living due to increased efficiency and production.
Australian exporter advantage:
- have a much bigger market
- allows for increased specialisation and larger production resulting in benefits of economies of scale (lower cost per unit)
- increases export related jobs
- overall improved sustainable economic growth and productivity due to access to better technology, capital equipment, methods of production
- better access to global markets, helping developing countries growth e.g. China and India
What are the disadvantages of international trade?
- Import competing companies (small or local businesses) face stronger competition and many may not survive - causes unemployment i.e., Australia’s motor vehicle industry
- Poor political relations (China) or world instability (GFC, COVID, war) can disrupt trade and supply lines and create supply shortages/ increase cost of materials
- Both negatively impact Australia’s sustainable economic growth
What are reasons to trade?
Trade matters to Australia because 1/5 jobs in Australia are related to trade
It is 20% of Australia’s GDP
Australians working in the export industry are paid on average 60% more than other working Australians.
Opening Australian markets to more trade had made households $3,900 better off
Australia’s two way trade in goods and services was worth around $700 billion in 2018 - a vital component of Australia’s economic prosperity
What traditionally was the composition of Australia’s trade, and why was this an issue?
Traditionally Australia relied on agricultural exports
This caused issues:
- Very susceptible to floods/ droughts - climate issues
- Low world prices (must accept prevailing market price of agricultural goods)
- Oversupply
- Low value added products (low profit margin)
Define Price takers / Price makers.
Price takers must accept the prevailing market price and sell each unit at the same market price - found in perfectly competitive markets.
Price makers are able to influence the market price and enjoy pricing power.
What is Australia’s primary product other than agriculture?
Agricultural issued forced Australia to move to another primary product, mining:
- Have a comparative advantage in the production commodity goods
Agriculture and mining = 2/3 of Net-Exports (mainly iron-ore, coal)
What is another important component of exports?
Services:
- Also a very important component to exports
- Are the growth area particularly to Asia
- Australia has a skilled and educated workforce thus education, financial, insurance, tourism , health and communications are in demand.
Why does Australia import large amount of manufacturing instead of producing themselves?
- Cost of labour is too high
- Have a close proximity to markers
- High exchange rate
- EOS
- Competitive market from countries like China, India and Thailand with low labour costs
What is the direction of Australia’s trade?
AUS traditionally traded with UK / European countries up to 1950s
In 1973 the UK joined the EU and thus AUS lost preferential treatment economically and subsequently gravitated towards USA and Japan
In the 1960s Japan was rapidly growing and demanded the resources AUS had - minerals, energy and food
Japan became our biggest exporter and had a POS balance of trade ( X > M)
In the 1990s Japan’s growth was becoming weak and Australia turned towards emerging Asian nations - like Taiwan, Singapore because of proximity and emerging growth
By 2007 China became our largest trading partner
By 2019 approx. 1/3 of commodity exports go to China and growth in trade
East Asia dominates direction of exports
Almost 30% of exports are for China
What are the issues with trading with China and United States?
Economic issues are created with China because of political tension and strains
United states is not a good trading partner as M > X (large trade deficit)
What countries does Australia have a positive trade relationship with? (trade surplus)
AUS have pos (X > M) economic relations with India, China, NZ and Japan
How do you calculate change in trade?
Change in trade x 100 / previous figure
Change in trade = current figure - previous figure
Define terms of trade.
the ratio of an index of a country’s export prices to an index of its import prices
What does terms of trade mean for economic relationships
If this index increases it implies Australia is receiving relatively more for its exports (better off - referred to as favourable moments in terms of trade)
If price of exports increases, but the price of imports remain constant - a positive terms of trade
If this index decreases it implies Australia is receiving relatively less
A fall in terms of trade implies Australia must export more goods and services to maintain the same level of imports
What is the basic premise behind theories of trade?
Specialisation allows a country to create better quality products in greater quantity. Specialisation and trade (imports and exports) help output and satisfy wants.
Explain the absolute advantage of trade.
- First founded by Adam Smith
- Developed the idea of specialisation - the product which a country specialises in is their absolute advantage
The theory of Absolute Advantage is based on which country can most efficiently produce a good
How can you demonstrate absolute advantage?
Absolute advantage –> greatest quality/ quantity
The country with the higher quantity in a PPF or table has the absolute advantage
Absolute advantage = best efficiency (through specialisation)
What is the benefit that specialisation and trade offer?
- Efficiency gains are reflected in production with specialisation
- If trade takes place after specialisation both countries will benefit
- The benefit that specialisation and trade offer is that both countries taken together produce a greater total output of both goods
Why is it necessary to trade?
(a) import goods and services that we either can’t produce at all or can’t produce cheaply enough
(b) export goods and services that can’t be produced overseas or that we produce more efficiently.
When is a country said to have absolute advantage?
A country is said to have absolute advantage if they can produce the same good using fewer resources than another country.
In addition, if the country can produce the most output using a given set of resources, they also have absolute advantage.
What are the assumptions in the absolute advantage model (PPC)?
- There are only two countries in the model
- Each country only produces the two commodities (goods or service)
- Each country has the same quantity of resources, but not the same quality
- The resources are perfectly mobile, i.e., can be moved from one industry to another
- Where trade occurs there are no transfer costs
Explain the theory of comparative advantage
- David Ricardo’s theory of comparative advantage (1817) argues that nations may benefit from specialisation and trade
- Even in cases when one nation has an absolute advantage over another nation in the production of all commodities.
- Based not on efficiency but on opportunity cost
- Even if one country can produce everything cheaper than another country, both countries can still benefit from this specialisation and trade.
- The theory of comparative advantage is based on which country can produce a goods at the lowest opportunity cost
Define the theory of comparative advantage
Countries should specialise and trade in the production of those goods and services that they have the lowest opportunity cost in and then trade with other nations in order to maximise the well being of both countries.
This means that even if a country can produce all goods more efficiently than another country (absolute advantage) both countries will still benefit from trade by specialising in those goods that have the lowest opportunity cost.
How does a country’s economy benefit from specialisation in the production of one or a few goods and services?
- Economies of scale – lower cost/unit due to large scale production
- Greater efficiency in the use of factors of production
- Less wastage & duplication
Explain the theory of competitive advantage
- The theory of competitive advantage claims that benefits are obtained through the capacity of a nation’s industries to innovate and upgrade
- This theory was devised by Michael Porter in 1990
- The theory argues that a nation’s prosperity is created, not inherited
- Ported stated a national competitiveness depends on the capacity of its industry to innovate and upgrade
What are the four factors of Porter’s Diamonds?
Factor conditions, Demand conditions, relating and supporting industries and film, strategy and rivalry
Explain the factor conditions of Porter’s Diamond
- The nation must have an advantage in factors of production (skill labour or infrastructure)
- Porter argues that nations do not to be well endowed with the factors
- They can be created through investment for infrastructure and a highly specialised trained workforce
Explain the demand conditions of Porter’s Diamond
- The nation can benefit from having a clear view of consumer demand
- First develops a domestic market to help anticipate international market needs.
- Choose something that people actually want
Explain Related and Supporting Industries of Porter’s Diamond
- A nation can gain an advantage by have efficient and internationally competitive supplier industries
- Make sure you have supporting industries (if building cars, you need supporting industries of motors, parts etc.
Explain Film, Strategy and Rivalry of Porter’s Diamond
- Conditions governing company creation, organised management and domestic rivalry needs to be more disciplined, flexible and supportive of innovation.
- Should be flexible and trying to be ahead of the game
(keep rivals out)
Define globalisation
The increasing convergence and interdependence of national economies to form one single global economy
This involves the integration between different economies and the increased impact of international influences on all aspects of life and economic activity
Global economic activity involves the trade of commodities, financial flows, global investment, TNC, technology, communication and labour
Define a multinational Corporation (MNC)
A business that operated in several countries; it generally has a base country (parent company)
Usually a company that generated 25% or more of its revenue from overseas competition is considered a multinational
Multinationals generate a good deal of foreign investment revenue from their subsidiary companies
They have many offices to take advantage of economic conditions like - local demand conditions, labour supply, taxation benefits, emerging economies (like China) and to avoid protectionist barriers
What do multinational supply chains consist of?
- Refers to their system of organisation, people, information, resources involved in moving a commodity or service from supplier to consumer
- Involves all the steps from attaining the raw materials, transformation process and final product
- Simply due to their large size, have complex supply chains
- 90% of the world’s global demand is met through international goods and services
What are factors which contribute to the growth of multinationals ?
- Location of natural resources
- Advances in technology
- Infrastructure and transport facilities
- Government incentives
What are ethical issues concerned with multinational supply chains ?
- Studies show that supply chains for multinational corporations fail to detect serious signs of abuse
- Like slave labour, child labour and human trafficking
- Corporations have designed a system of self-regulation which allows their suppliers to cover up abuses and easily cheat a weak inspection system
- Supply chain audits are ineffective tools for detecting, reporting or correcting environmental and labour problems
How does technological trade contribute to globalisation (expanding international trade)?
Technological advancements help improve transportation and the efficiency of communication
Contribution:
- Faster and cheaper flow of people, product and ideas
- MNCs can more efficiently manage and coordinate production across a number of countries
- Opened new opportunities to access resources in other countries
- Improved transport allow the benefit of cheaper and faster production. This allows production supply chains to be spread over a number of countries yet still be efficient (time and cost)
How do trading blocks contribute to globalisation (expanding international trade)?
- Trading blocks facilitate trade by removing tariffs, quotas and tax instead providing preferential treatment
- Results in increased global production, exchange of technologies and lower prices
For example: Australia’s part in APEC has led to the negotiation of several bi-lateral trade agreements which provide AUS greater access to the growing Asia area (expanding exports)
An economic union is considered one of the different types of trade blocs and refers to an agreement between countries that allow products, services and workers to cross borders freely
Define an economic union
Economic unions require the integration of monetary and fiscal policies so that member countries can coordinate policies, taxation and government spending relating to this
- Also use a common currency that comes with fixed exchange rates
- Participant countries have common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy
- I.e., European Union
What is the primary purpose of APEC (Asia Pacific Economic Cooperation)?
- APEC’s primary purpose is to facilitate economic growth and prosperity in the region
- Have the vision of creating a seamless regional economy
- They pursue these objectives through trade and investment liberalisation, business facilitation and economic and technical cooperation
- APEC aims to strengthen regional economic integration by removing impediments to trade and investment
- Also aim to enhance supply chain connectivity across the border and improve the business environment
- Endeavours to improve the operating environment for businesses by reducing the cost of cross-border trade and improving access to trade information and simplifying regulatory and administrative processes
Name two bilateral free trade agreements Australia participates in
CERTA (Closer Economic Relations Trade Agreement)
- Bi lateral agreement between Australian and NZ
- Extended to uniform business regulations and taxation laws
- Increase in trade 8%
CHAFTA (China Australia Free Trade Agreement)
- Came into force on 20 December 2015
- It lays historic foundation for the next phase of Australia’s economic relationship with China
- The agreement unlocks significant opportunities for Australia in China
How do free trade agreements benefit the global economy
- FTAs foster freer trade flows and create stronger ties with our trading partners.
- FTAs don’t just eliminate tariffs, they also address behind-the-border barriers that impede the flow of goods and services between parties, encourage investment, enhance cooperation, and can address other issues, such as intellectual property, e-commerce and government procurement.
- FTAs promote regional economic integration and build shared approaches to trade and investment, including through the adoption of common Rules of Origin and through broader acceptance of product standards.
Define a Free Trade Agreement
A FTA is an international treaty which removes barriers to trade and facilitates stronger trade and commercial ties, contributing to increased economic integration between participating countries.
How do free trade agreements benefit the Australian Economy?
- FTAs open up opportunities for Australian exporters and investors to expand their businesses into key overseas markets.
- FTAs can improve market access across all areas of trade — goods, services and investment — and help to maintain and stimulate the competitiveness of Australian firms.
- FTAs can increase Australia’s productivity and contribute to higher GDP growth by allowing domestic businesses access to cheaper inputs, introducing new technologies, and fostering competition and innovation.
- FTAs can enhance the competitiveness of Australian exports in the partner market, and add to the attractiveness of Australia as an investment destination
How does deregulation contribute to globalisation (expanding international trade)?
- Refers to the loosening or removal of government controls over business activity
- This has happened in Australia’s banking sector and telecommunications. Internationally has happened on environmental controls, wages, health and safety standards etc.
- Financial deregulation of banking sector and labour markets (enterprise bargaining) to promote more competition, productivity, efficient resource use, lower consumer prices, increased international competitiveness.
- Governments impose barriers to trade protectionism for economic and political reasons
- Deregulation is removing these barriers on the free flow of trade and investment
Explain the World Trade Organisation
- The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations.
- At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments.
- The goal is to help producers of goods and services, exporters, and importers conduct their business.
- The WTO promotes sustainable economic development through promoting free trade having desirable effects on the world economy, facilitating trade negotiations, and settling trade disputes
How do MNCs contribute to globalisation (expanding international trade)?
- Gain a competitive advantage by locating operations in other countries where they have a comparative advantage in specific areas of operations
- This may include locating production in a country that has accessible resources / locating in a country that has a low cost labour
- Are responsible for greatly increasing the level of Foreign Investment around the globe over the last 20 years
- Host governments tend to regulate foreign investment because MNCs agenda or policies may conflict with the government
How does changed political and development strategies contribute to globalisation (expanding international trade)?
- The global economy has become more open over the last few decades
Vietnam, China, Cuba and Eastern Europe have all opened up to international trade
Other countries like Hong-Kong, Korea, Singapore and Taiwan have emerged and have export focused production
These economies have been developing rapidly > these economies are called emerging market economies . Their emergence has created a much larger global world market for trade
How do global organisations contribute to globalisation (expanding international trade)?
World Trade Organisation -The goal is to help producers of commodities, exporters and importers conduct their business and set out rules of fair trade
International Monetary Fund - working to foster global monetary cooperating, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty world-wide
United Nations- has the central mission of maintenance of international peace and security
which is done by working to prevent conflict, helping parties in conflict to make peace & other peace keeping missions
Organisation for Economic Co-operation and Development - promotes trade in market economies providing a platform to compare government policy, identify good practices and coordinate domestic and international policies of its members
World Bank - An international financial institution that provides loans and grants to the government of poorer countries for the purpose of pursuing capital projects
Define a gold exchange standard
a monetary system under which a nation’s currency may be converted into bills of exchange drawn on a country whose currency is convertible into gold at a stable rate of exchange.
Define a trade weighted index
known as the real broad index, measures the strength of the US dollar relative to the currencies of the nation’s trading partner
Explain exchange rates
Exchange rate is simply defined as the value of a currency expressed in the terms of another nation’s currency
- the conversion between currency is a complexity faced in trade
Why do different economies have different exchange rates?
- these rates reflect the state of the economy i.e., the US exchange rate is higher than others because they have an affluent and rich economy - high demand in their country and thus higher exchange rate
- Interest rates, high interests rates attract foreign investors . Cost structure of the economy i.e., wages, taxes, inflation
- More developed countries have the better exchange rates
Define appreciation and depreciation
Appreciation - the increase in the value of a currency relative to other currencies under a floating exchange regime. Appreciation of the dollar reduces the price of imports (good) but increases the price of exports (bad)
Depreciation - the decrease in the value of a currency relative to other currencies under a floating exchange regime. A depreciation of the AUS $ increases the price of imports but decreases the price of exports
Identify the types of exchange rates
Fixed exchange rates: a system where the value of a currency is a set value - only the government has the right to devalue or revalue the currency
Floating exchange system: a system by which the exchange rate for a currency is determined by the force of supply and demand.
Dirty Flow exchange system: ‘Dirty flow’ is a managed exchange rate which is in between a floating and fixed exchange system. Basically is based on supply and demand, but the RBA can intervene in the market at time of exchange rate instability by buying or selling Australian $
What are the factors affecting the demand of Australian Dollars
Australian exports must be bought with Australian dollars
An increase in demand for Australian imports thus results in an appreciation of the dollar as there is more foreign demand for the Australian dollar (for the exports in which they import)
Australia must maintain international competitiveness - the more competitive and efficient the economy is the lower the cost to consumers and thus increased demand for exports
Global conditions like the GWP (gross world product) increasing allows Australia to benefit from a developing economy like China’s growth
If the GWP is low like in the global financial crisis then demand for Australian exports decrease
Australia’s inflation rate impacts demand because the consumer price index means lower price, increasing number of exports and demand
Capital inflow impacts demand due to investment in Australia which is largely determined by relative interest rates and investor confidence
Speculation that the Australian dollar will appreciate encourages an increase in demand for the Australian dollar i.e., through investment
What are the factors affecting the supply of Australian Dollars
Demand for imports leads to an increase in supply of Australian dollars as consumers will exchange AUD for foreign currency
This demand for imports is determined by the inflation rates in Australia relative to those overseas and the competitiveness of domestic firms
Capital outflow affects supply due to investment overseas which is largely determined by investment opportunities available and relative interest rates attainable overseas
Speculation that the Australian dollar will depreciate causes an increase of supply of the AUD because consumers will then sell AUD for other currencies.
