Trade and Globalisation - L2 International Trade and Living Standards

Question 1

What is an open economy?

Answer 1

An open economy is one that interacts freely with other economies in the world with regard to trade (exports and imports) and finance.

Question 2

What is a closed economy?

Answer 2

A closed economy is one that does not interact (trade) freely with other economies in the world with regard to trade (exports and imports) and finance.

Question 3

Why do countries engage in trade?

Answer 3

1. Lower prices for consumers.
2. Greater choice for consumers.
3. The ability of businesses to achieve economies of scale.
4. Access to more resources for business and government.

Question 4

Engaging in international trade gives Australian consumers and businesses access to lower prices because …

Answer 4

the increase in trade allows producers to access cheaper supplies from overseas producers. In addition, it ensures local producers face higher levels of competition from foreign producers which incentivizes them to maintain low prices to remain competitive.

Question 5

Engaging in international trade gives Australian consumers and businesses
access to a greater range of goods and services because …

Answer 5

a range of goods and services are not produced in Australia for various reasons, from lack of technical knowledge in specific areas, through to not having a strong manufacturing base. Trade enables businesses to access these goods and services.

Question 6

Define Economies of scale

Answer 6

The volume that a business needs to produce so that it can cover its fixed costs and operate in a market at a competitive level.

Question 7

Define Fixed Costs

Answer 7

Costs such as rent, insurance, internet and salaries. Fixed costs indirect, meaning they don’t generally apply to the production process and are constant whatever the amount of goods produced.

Question 8

Define Variable Costs

Answer 8

Costs that are directly related to production and vary with the level of output. Variable costs are usually a per unit cost.

Question 9

Engaging in international trade enables Australian businesses to achieve economies of scale by …

Answer 9

accessing a larger market, which enables businesses to achieve the volume of production that is needed to effectively cover its fixed costs and operate in a market at a competitive level.

Question 10

Engaging in international trade enables Australian businesses to access to more resources for business and government as …

Answer 10

Through trade, Australian businesses have access to more physical capital (such as machinery) that may not be available in Australia or cannot be acquired cheaply enough.

Through trade, Australian businesses have access to more foreign human capital (labour) that may be in short supply in Australia which can assist in removing capacity constraints (such as skill shortages)

International trade expands the quantity and quality of resources available to local businesses, allowing them to boost their production  growing businesses, jobs, incomes and profits.

Trade also allows governments to access and pay for the various types of resources it needs to produce public goods and infrastructure like transport, education, health and defence, thus improving living standards.