Economics - U3 AoS3

Gains to International Trade

1. International trade increases access to resources, enabling higher production and living standards

2. International trade increases specialisation, efficiency and living standards

3. International trade promotes greater economies of large-scale production and living standards

4. International trade boosts GDP, jobs, incomes and living standards

5. International trade increases consumer choice and living standards

6. International trade keeps consumer prices lower, improving living standards

Trade Liberalisation can dismantle trade protectionism by:

• cutting the level of tariffs and thereby making foreign goods cheaper
• reducing government cash subsidies paid to local firms and so allowing imports to compete on the same basis as locally manufactured products
• abolishing import quotas that restrict the volume of foreign goods entering the country
• signing up to more bilateral (usually between two nations) and multilateral (between many nations) free trade agreements (FTAs) with other countries.

Absolute cost advantage

Occurs if a nation is the cheapest or most efficient producer of a single good or service in the world.

Appreciation

Of the exchange rate occurs when the value of a nation’s currency rises against another currency.

Balance of payments account (BOP)

an annual statistical record of Australia’s financial transactions with the rest of the world. In turn, these transactions are divided into two main types of transactions — current transactions, and transactions involving the capital and financial accounts, each recording credit and debit transactions.

Balance on capital account

(also called the capital account balance) is a subsection in the BOP capital and financial accounts. It records the total value of credits minus the total value of debits for capital transfers and other intangible assets.

Balance on current account

(also called the capital and financial account balance) is equal to the total value of all credits minus the value of all debits for goods, services, primary incomes and secondary incomes, measured over a period of time. The balance can be a CAD or a CAS.

Balance on financial account

is a subsection in the BOP capital and financial accounts. It mainly records international transactions involving the movement of money capital or investment, as well as the dealings of the Reserve Bank of Australia (RBA).

Comparative cost advantage

occurs if a nation specialises in a few key areas of production where its cost advantages are greatest or its disadvantages and opportunity costs are lowest.

Current account deficit (CAD)

is when the value of all current account debits exceeds the total value of all current account credits for goods, services, primary incomes and secondary incomes, measured over a period of time.

Current account surplus (CAS)

is when the value of all current account credits exceeds the total value of all current account debits for goods, services, primary incomes and secondary incomes, measured over a period of time.

Cyclical influences

s can affect the nation’s current account balance causing it to become stronger or weaker as AD and economic activity slow or rise. Cyclically stronger spending domestically normally tends to increase imports and slow exports, weakening the current account balance. In addition, weaker spending overseas has a similar effect. In contrast, cyclically weaker spending domestically or stronger spending overseas, tend to strengthen the current account balance.

Depreciation

of the exchange rate occurs when the value of a nation’s currency falls against another currency.

Direct investment

involves capital movements into and out of Australia that involve the establishment, purchase or expansion of companies and other assets.

Economies of large-scale production

are reductions in a firm’s average costs per unit associated with an increase in its production levels, perhaps enabled by trade liberalisation (e.g. the signing of FTAs) and bigger export markets.

Exchange rate

The number of units of another currency that can be purchased with or swapped for one unit of our currency

Foreign exchange market

is where international currencies are swapped or converted into other currencies.

Free trade

involves governments abolishing protection of local industry by completely removing tariffs, subsidies and import quotas, thereby forcing local firms to become more internationally competitive.

Free trade agreements (FTAs

Involve two or more nations agreeing to remove various forms of protection of their local industries. They are often seen as beneficial because countries will be inclined to specialise in areas of comparative cost advantage where opportunity costs are minimised and material living standards maximised.

Import quota

a government restriction on the quantity of particular goods that can be imported.

International competitiveness

means that Australian businesses are relatively efficient in their use of resources, and can compete or sell their goods and services both here and in markets around the world at a lower price than their overseas rivals.

International specialisation

occurs when countries produce only a limited range of goods and services, focusing on those areas where they have the greatest comparative cost advantage (or least disadvantage), increasing allocative efficiency.

Labour productivity

or efficiency is commonly measured by the value of GDP per hour worked.

Multifactor productivity

measures the efficiency with which the combined inputs of labour, capital and natural resources are converted into production.

National savings–investment gap

is the shortfall in value between what Australian households, firms and governments save and the level of their investment. This must be covered by overseas borrowing or debt.

Net errors and omissions

is an item that reflects the inaccuracies in the recording of international transactions. Its value can be positive or negative.

Net foreign debt (NFD)

is the cumulative difference in value between what Australian households, businesses and governments have borrowed from and owe overseas minus what Australia has lent or invested abroad. This debt entails paying interest and repaying the capital borrowed at some time in the future.

Net foreign equity (NFE)

is the difference in value between foreign-owned Australian assets (such as property, shares and the retained earnings of overseas-owned companies operating here) and overseas assets owned by Australian residents.

Net goods

is a subsection of the BOP current account that records the value of credits for goods exported minus the value of debits for goods imported from overseas, measured over a period of time.

Net primary incomes

is a subsection of the BOP current account that records the value of credits for primary income received from overseas minus the value of debits for primary income paid to overseas, measured over a period of time.

Net reserve assets

includes the value of foreign currencies, monetary gold, and required contributions to overseas governments and international agencies.

Net secondary income

is a subsection of the BOP current account that records the value of credits for secondary income received from overseas minus the value of debits for secondary income paid to overseas, measured over a period of time.

Net services

is a subsection of the BOP current account that records the value of credits for services exported minus the value of debits for services imported from overseas, measured over a period of time.

Non-official debt

represents borrowing overseas by Australian businesses to finance expansion.

Official deb

represents net borrowing by the government, perhaps to finance budget deficits

Portfolio investment

involves money transactions into and out of Australia involving shares, debt and securities.

Productivity

measures the efficiency or output gained from a certain quantity of productive inputs. GDP per hour worked is a measure of labour productivity. There is also multifactor productivity which measures the output gained from the inputs of all resources.

Structural influences

affect the current account balance. Unfavourable supply-side structural factors like high production costs, tax rates and low productivity for example, weaken a nation’s current account balance.

Subsidies

are a form of trade protection and involve government tax concessions or cash payments to local firms to help cover some of their production costs, allowing local products to be sold more cheaply and competitively at home and abroad.

Tariff

An indirect tax added onto the price of imports to make them dearer to local consumers and protect local industries from overseas competition.

Terms of trade (TOT)

is an aggregate demand factor. It represents the ratio of the average prices we receive for our exports relative to the average prices we pay for imports. A rise in Australia’s terms of trade is said to be favourable because the world is prepared to pay us higher prices for our exports relative to the prices we pay for imports. Put another way, a given unit of exports will pay for a greater quantity of imports.

Trade liberalisation

is a government policy that entails reducing protection of local industry by gradually cutting tariffs, subsidies and import quotas, and the signing of FTAs.

Trade protectionism

is the opposite to trade liberalisation and involves governments increasing barriers to international trade and the flow of goods and services into countries (e.g. using higher tariffs, subsidies, import quotas to limit foreign competition).

Trade weighted index (TWI)

is an overall guide to the value of the Australian dollar measured against a basket of other currencies, each weighted according to its relative importance in Australia’s trade.