Transcript 2nd ed Chapter 8x

Chapter 8 – Free Trade
8.1 What is Trade?
8.2 Specialisation and Absolute Advantage
8.3 Comparative Advantage
8.4 International Trade
8.5 Winners and losers from trade
8.6 Protectionism
8.7 Free Trade vs. Protectionism
8.8 Free Trade Agreements
8.9 The Size and Patterns of Australia’s Trade
8.10 Globalisation
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1
What is Trade?
Trade is the exchange of goods, services and currency in a
market.
Individuals, firms and countries trade goods and services in
order to exchange something they have to get something
different in return.
Free trade refers to trade that is unregulated by the government
and free of restrictions and taxes.
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Specialisation and Absolute
Advantage
Specialisation is when a producer only produces the goods that they are best at
producing.
Absolute advantage is a situation where one party can produce a good or service at a
lower cost or more efficiently than the other.
If each producer produces the good in which they are best at producing (have an
absolute advantage), total production in the economy (or internationally) will be
maximised, creating an efficient outcome.
China enjoys an
absolute
advantage in
cheap,
abundant
labour.
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Comparative Advantage
Comparative advantage is when a firm (or person or country) can
produce a good at a lower opportunity cost than another firm.
A firm may not have absolute advantage in producing any good, but it
will still have a comparative advantage in producing some good.
Total production increases when each firm specialises in producing the
good(s) in which they have the comparative advantage.
Through trade both firms can be better off.
• See explanation pg. 286
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Ricardo cited
wine as an
example of
comparative
advantage.
4
International Trade
Trade between countries will occur when:
– One country does not possess a resource or good that
another country has and there is demand for it.
– Both countries have the resources to produce a good, but one
country has an absolute advantage in producing the good.
– One country has a comparative advantage in producing a
good.
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Winners and Losers from Trade
Trade will benefit the economy as a whole as total surplus will
increase.
Exporters will gain
from increased
trade
Domestic
producers of
import competing
goods will lose
Consumers will
benefit
Overall the economy will be better off. Domestic import
competing firms may have to change production to a good
where they have a comparative advantage. This will lead to
efficiency in the long run.
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Protectionism
Protectionism is when governments enforce restrictions on trade
to protect local industries from foreign competition.
Types of protectionism:
Tariffs
• Taxes on
imported
goods
Embargoes
Quotas
Subsidies
• A total ban
on imports
of a product
of from a
nation
• A unit
restriction
on imports
of a certain
good
• A cash
payment to
a local
producer by
a
government
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Free Trade vs. Protectionism:
The arguments for free trade
Increased competition:
– Promotes efficiency through increased competition.
– Producers forced to produce the goods in which they are
most efficient on a world scale.
– Inefficient industries will struggle to survive as they are
undercut in price by more efficient overseas firms.
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Free Trade vs. Protectionism:
The arguments for free trade
Specialisation and comparative advantage
– By specialising in producing goods in which they have a
comparative advantage and importing goods they produce
less efficiently, countries can increase total production.
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Free Trade vs. Protectionism
The arguments for protection
Infant industry argument
– Industries that are just starting out need protection from
foreign competition.
– Governments cannot protect every firm, may resort to
“picking winners”, such as in South Korea.
– Can help in a developmental context.
– May put money into an inefficient source of production.
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Free Trade vs. Protectionism
The arguments for protection
Jobs Argument
– Free trade will lower the prices of domestic firms to compete
with foreign firms, which will lower profits and cause job
losses.
– In reality free trade should just cause a movement of workers
from inefficient import competing industries to efficient
export industries.
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Free Trade vs. Protectionism
The arguments for protection
National Security Argument
– Goods must be produced locally in the interests of national
security. (i.e. steel to make tanks and guns)
– Only legitimate if there are actual concerns over national
security.
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Free Trade vs. Protectionism
The arguments for protection
Fair Competition Argument
– Trade must be free on both sides in the interests of fair
competition (otherwise the protected side gets all the
benefits).
– Possibly the only valid argument for protection.
– As there are incentives for both sides to renege on free trade,
countries enter into binding free-trade agreements.
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13
Free Trade Agreements
Due to the fair competition argument countries sign free trade
agreements to keep trade free of protection.
Australia has free trade agreements with ASEAN, Chile, the
United States and New Zealand.
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Protectionism in Australia
Since the 1980s Australia has slowly been removing its
restrictions to free trade as part of its microeconomic reform and
deregulation policy to increase efficiency and productivity in the
economy.
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The Size and Patterns of Australia’s
Trade
Australia was the 20th largest trading nation in 2010.
Australia’s biggest export sector is minerals and fuels, driven by
demand from China. Australia has a comparative advantage in
providing fuel and minerals.
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Globalisation
Globalisation is the greater movement of people, goods,
capital and ideas around the world due to increased
economic integration.
The world economy now transcends national boundaries
so that the scope for governments to influence domestic
economic outcomes has diminished.
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Benefits of Globalisation
• Greater opportunities for growth.
• Lower prices for consumers, greater choice of goods.
• More export markets for domestic manufacturers.
• Creates economies of scale through specialisation.
• Greater competition.
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Costs of Globalisation
Increases opportunities for wealthier nations to take advantage of poorer ones.
Contributes to increased pollution and environmental degradation because firms can outsource
production to where environmental standards are less strict.
Keeps developing countries producing primary products which offer little scope for economic
growth.
Cultural erosion may take place as traditional goods and services are replaced.
A diamond
mine in
Sierra
Leone
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