U3 AOS 3: The gains from international trade, including lower prices, greater choice, access to resources, economies of scale, and increased competition and efficiency Flashcards
(32 cards)
What is international trade?
International trade occurs when countries buy and sell goods and services with each other.
What does importing refer to?
Importing refers to buying goods from other countries.
What is exporting?
Exporting refers to the act of selling goods and services to another country.
What are capital flows from a trading perspective?
Capital flows occurs when money or investments move between countries.
Eg, when a business in one country invests in business in another
What percentage of the world’s total economic activity does global trade make up?
Global trade makes up over 70% of the world’s total economic activity (GDP).
How does global trade help improve living standards?
Global trade improves both material living standards (MLS) and non-material living standards (NMLS ), as it creates job opportunities, boosts income and gives people a wider range of affordable goods + services
What is trade liberalisation?
Trade liberalisation means lowering or removing barriers that make trade harder.
What are examples of barriers that trade liberalisation seeks to remove?
- Tariffs – taxes on goods coming from other countries
- Subsidies – government money that helps local businesses compete
- Quotas – limits on how much of something can be imported
What is protectionism?
Protectionism is the practice of adding or maintaining trade barriers to protect local businesses from foreign competition.
Eg, the US which increased tariffs on goods from China, this is protectionism as it helps protect American businesses, but it can also lead to increased prices for shoppers (consumers) and can cause trade disputes with other countries
What are the benefits of reducing tariffs?
- Makes foreign goods cheaper
- Enhanced allocative efficiency - reduced tariffs allow consumers to access a wider range of goods and services from international markets, this enables consumers to better satisfy their preferences leading to a more efficient allocation of resources
*Reduced costs of production
What does abolishing import quotas do?
Allows more foreign goods to enter the country.
What are the two types of free trade agreements?
- Bilateral (between two countries) * Multilateral (between many countries)
What are six ways that nations can gain from international trade?
- Access to resources
- Given that countries have different natural, labour, capital resources, international trade (IT) allows countries to access resources that would not be available domestically
- this enables them to lift their output rates and income, leading to improved living standards
- Specialisation in production
- As different countries having differing resource, IT allows a nation to specialise in the production of particular type of goods and services (g/s) where its most efficient or has a comparative cost advantage
- specialisation increases efficiency + ensures that more output can be gained from the resources available, leading to greater satisfaction of our wants and wellbeing (improves overall living standards)
- Larger international markets
- IT allows local businesses to sell their g/s in bigger sized international markets, lowering their average unit costs and gaining greater economies of larger-scale production, in comparison to if they only sold in relatively small and local national markets
- This helps to increase our living standards*
- Increased efficiency
- By increasing efficiency, IT increases: exports, EG, jobs, incomes and living standards
- Greater consumer choice
- IT leads to a greater satisfaction of wants than would otherwise be the case
- Lower prices due to competition
- Through exposing local firms to greater competition from imports in domestic markets, IT allows us to consumer cheaper/more affordable g/s
- this increases the purchasing power of our incomes and living standards
*Economies of scale
* Refers to the fall in average costs per unit which firms experience when they produce a large amount of output due to fixed costs (eg, start up costs) can be spread more thinly over a higher amount of output
What is absolute cost advantage?
Absolute cost advantage occurs if a nation is the cheapest or most efficient producer of a single good or service in the world.
What is comparative cost advantage?
Comparative cost advantage occurs if a nation specializes in production where its cost advantages are greatest or disadvantages are lowest.
What does economies of scale refer to?
Economies of scale refer to the fall in average costs per unit when firms produce a large amount of output.
How does international trade encourage specialisation?
International trade allows businesses to grow their sales volumes by producing on a larger scale for a global market.
What is the impact of increased competition on allocative efficiency?
In the long term, the resources freed up by failed inefficient industries (eg. car manufactures in Australia) will be reallocated to industries where Australia has a comparative cost advantage (more efficient)
Fill in the blank: International trade allows local businesses to sell their goods and services in ________ sized international markets.
bigger
What is a consequence of trade liberalisation?
Job Losses in Some Industries – Local firms may shut down if they can’t compete with cheap imports (e.g. Australian car manufacturing).
Increased Inequality – Some workers may benefit more than others.
Environmental Impacts – More production and transport can increase emissions.
Over-dependence on Global Markets – If global trade slows down, Australia can be badly affected (like during COVID-19).
What are some benefits of trade liberalisation?
- Trade allows access to a wider variety of goods and services.
- Firms can access foreign capital resources (like machinery), skilled labour, and finance, supporting business expansion and investment.
- Countries specialise in producing goods they can make at the lowest relative cost.
- This boosts allocative and productive efficiency, lifting GDP and living standards.
- Absolute advantage: A country produces a good more efficiently than others (e.g. Australia in iron ore).
- Comparative advantage: A country focuses on goods with the lowest opportunity cost, maximising output and income.
- Trade lets firms produce on a larger scale, reducing average costs.
- Fixed costs (like R\&D or marketing) are spread over more units, lowering prices.
- Leads to higher international competitiveness, stronger purchasing power, and improved material living standards (MLS).
- Exposure to global rivals forces local firms to improve efficiency.
- Resources shift from inefficient industries to those with a comparative advantage.
- Result: Lower prices, better use of resources, and enhanced purchasing power, boosting MLS.
What effect does global trade have on competition?
It increases competition from countries with lower wages.
How can global trade impact wages at home?
It can stop wages from rising quickly.
Why do companies benefit from lower wages in global trade?
It helps companies keep costs lower and goods more affordable.
