Free Trade and Protection Flashcards
What does Australia rely on the international sector for?
- the sale and purchase of g & s
- funds for investment
What is the meaning of an open economy?
the movement of g & s and capital is generally unrestricted, that is, they move freely between Aus and the rest of the world
What does engaging in trade do?
expands a nation’s consumption possibilities by providing access to other countries’ production through imports exporting incresases a nation’s production
- increases specialistion
- economies of scale
- increased productivity
- higher real incomes
- promotes economic growth
What are factors affecting levels of exports?
- size and structure of the economy
- its relative competitiveness
- its location
How is the size of international trade measured?
by calculating the share of trade in its GDP
- trade to GDP ratio = trade openess ratio = trade intensity ratio
- trade intensity = [1/2 (X + M)/GDP] x 100
What are the factors affecting trade intensity?
- relative size of the economy
- its location relative to foreign markets
- extent of barriers to trade - natural (high transport costs due to geographic isolation)/artificial (tariffs)
What are the gains from specialisation and trade?
- countries specialise in the production of certain goods and services to which they are best suited. Surplus production can then be exchanged/traded for other g & s
- the alternativ to specialisation is self-sufficiency
- international trade involves speicalisation and exchange - international specialisation is made possible because of the uneven distribution and quality of resources between countries
- differences inthe distribution of resources in terms of both quantity and quality will affect the cost of supply g & s. If production costs difffer then countries will benefit by speicalising in the g & s in which they are most efficient, exportin gsurplus and importing those g & s in which they are least efficient
How is relative efficiency measured?
in terms of opportunity cost. Opportunity cost reflects the real cost of production - the value of all resources that must be used to produce a good or service
What is absolute advantage?
when a country can produce a good more efficiently (using less resources to produce a given quantiy of ouput/producing more output from a given quantity of resources) than an other country
What is the terms of trade?
represents the rate at which different commodities exchange for each other between countries, it will always lie somewhere between the oc ratios for the 2 goods
What is comparative advantage?
refers to a country’s relative advantage
- when a country has an absolute advantage, its comparative advantage lies where its absolute advantage is greatest
- when a country has no absolute advantage, its comparative advantage is in the good where its absolute disadvantage is smallest
How is comparative advantage measured?
- comparative advantage is measured in terms of oc. A country is said to have a comparative advantage in the production of a good over another, if the oc of producing that good is lower
- countries gain by specialising in the production of goods in which they have an oc advantage (relativeky more cost efficient)
What occurs when a country exports?
- if the world price for wheat is above the domestic price for wheat, Asu hasa comparative advantage in producing wheat and will export wheat (Q1Q2)
- wheat consumption will fall to Q1 but wheat production will increase to Q2
- wheat consumers in Aus will lose because they consume less and receive a higher price (surplus reduced to a from a+b+c)
- wheat producers gain by selling more wheat and receiving a higher price (surplus increased to b+c+d+e+f from d+e)
- f represents net gain from exports (increase in economic welfare)
What occurs when a country imports?
- if the world price is lower than the Aus price for computers, this means that Aus is less efficient. It will pay Aus to import at a lower world price
- imports = Q1Q2
- consumption will increase to Q2 while domestic production will fall to Q1
- computer consumers gain as they receive lower prices and increased consumption (surplus increases from a to a+b+d+e)
- computers lose as they receive lower prices and sell less (surplus reduced from b+c to c)
- overall economic welfare increased as consumers gain>producers lose
What are the sources of comparative advantage?
- a nation’s resources - human, natural, capital
- technological progress
What is a tariff?
a tax placed on imports designed to allow local producers to charge a price which is higher thant the world price, it also is designed to increase the price of foreign g & s so that the competing domestic good receives a price benefit
- after it is implemented, imports fall from Q1Q2 to Q3Q4
- expansion in local supply (Q1 to Q3) and contraction in local demand (Q2 to Q4)
- decrease in CS - it goes to PS, govt revenue and DWL
- increase in PS
- other producers will be affected, having to pay higher prices for imported goods, production and consumption in other sectors will lower and exports for other producers may lower and cause net decrease in employment
- if a tariff was raised to equilibrium, this is total protection
What is a subsidy?
payments made by the govt to domestic producers to directly lower the cost of production, it enables a domestic producer to sell their product at a lower price to compete against imports
- after it is implemented domestic supply expands to Q3 and imports reduce to Q3Q2
- increase in local supply (Q1Q3)
- consumers bear an indirect burden in that the cost of the subsidy has to be paid for from govt tax revenue and there is an oc, also affects resource allocation as it rewards inefficient producers
- although there is no decrease in CS, the cost of the subsidy is greater thaatn the increase in PS
