Lecture 6: International Food Markets Flashcards Preview

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Flashcards in Lecture 6: International Food Markets Deck (25):

Approximately what percentage of the Australian agribusiness activity is engaged in the international market?



Is AUS a 'price taker' or 'price maker' in terms of international food trade?

- Small country in most international markets
- Limited scope for domestic market actions to influence international prices --> 'price taker'
- 'Price makers' - countries with larger share in the market which can strongly influence international markets


Why do countries trade?

Facilitates more efficient use and distribution of scarce resources and usually results in improved economic wellbeing


Absolute advantage

Country uses fewer resources to produce a given
unit of output than the other country.


Comparative advantage

Country can produce the output at a lower marginal cost in terms of other goods foregone than the other country, i.e. opportunity cost


Importance of absolute vs comparative advantage in trade

- Absolute advantage is NOT important for trade and may not always happen
- All about comparative advantage!


When does a country face opportunity costs?

When it employs resources to produce goods and services (the opportunity to utilise these resources to produce an alternative goof or service is given up)


Define 'gains from specialisation'

Reallocation of resources to places where these resources can be used most efficiently


What are the 3 categories that theories of trade can be grouped into?

1. Gravity
2. Natural comparative advantage
3. Created comparative advantage


Theories of trade - gravity

Market size and distance between markets determine the volume of trade


Theories of trade - natural comparative advantage

Differences in labour, capital, natural resources and technology create productive advantages for countries


Theories of trade - created comparative advantage

1. Economies of scale - larger producers are more efficient and so create productive advantages for countries
2. Product differentiation and innovation


Trade creates winners and losers

- Consumers may benefit from lower prices of imported
food, or farmers might benefit from higher international
prices for their products

- Farmers bear cost when imported products replace the
locally produced products, and consumers bear costs
when exports of farm products result in higher food prices


Domestic market welfare before exporting

- Area above supply curve but below demand curve
- CS and PS equal
- CS - above domestic equilib price
- PS - below domestic equlib price


Domestic market welfare after exporting

*World price higher than domestic equilib price --> benefits producers
- CS contracts, PS increases, net increase of D (gains from trade)


Foreign market welfare before exporting

- Same as domestic welfare before export
- Area above supply curve but below demand curve
- CS and PS equal
- CS - above domestic equilib price
- PS - below domestic equlib price


Foreign market welfare after exporting

* World price lower than domestic equlib price --> benefits consumers
- CS increases, PS contracts, net increase of H (gains from trade)


Excess supply - excess demand

• Framework used to represent gains and losses in
when individual markets meet in the international
• Differences in domestic and foreign prices reflect
comparative advantages
• Can use this framework to examine the impact of
international shocks (demand and supply side) and
Government interventions (tariffs, subsidies, quotas)


Protectionism in trade

Policies which seek to prevent the free-trade of goods in order to benefit some group in a country
- Tarrif barriers e.g. import tariffs, quota-rate tariffs
- Non-tariff barriers e.g. import quality and quarantine restrictions


Government trade policies

Exist somewhere between the two extremes of protectionism and free-trade


Import quotas

- Quantity restriction becomes the effective foreign excess demand curve
- New international price at intersection between quota quantity and excess demand curve
- Producers surplus contracts and consumers are buying @ a lower price


Define 'quota rents'

Profits made by companies that are allocated the rights to import goods that are subject to quotas and are therefore artificially scarce

- Importers buying at a lower price and selling at a higher price


Exchange rates in trade

- The more expensive (stronger) the local currency is in terms of a given foreign currency, the less competitive are the local goods to that foreign country
- Volatility in exchange rates can have long-term implications for agribusinesses establishing markets in foreign locations


Impact of currency appreciation on Excess Supply - Excess Demand

- Pivot upwards of domestic excess supply curve
- Every unit AUS supplies into the US is now more expensive
- Less demanded but higher prices


Impact of currency depreciation on Excess Supply - Excess Demand

- Downwards pivot of domestic excess supply curve
- More demanded but lower prices