ECONS- 2. FREE TRADE AND PROTECTION

1. Define Specialisation

• when countries choose to produce certain g and s that are suited to them

1. how is spec and trade possible

• Uneven distribution and quality of resources between countries

• Eg. Japan specs in high quality manufactured goods due to lack of natural resources

  

1. Which goods should countries produce?

• G and s that are most efficient and then export surplus production and import less efficent produced g and s

  

2. define RELATIVE EFFICIENCY

   and give example

• fficiency measured in terms of oppurtunity cost, which reflects real cost of prod

• Eg. Accountant is highly skilled in Task A and B= absolute advantage but is better at task B.

• Hires assistant who is bad at both but better In task A- thus Assistan does task A and accountant does B= gain.

• Accountant doing task B= exports to others

• Assistant does task A= imports from others.

  

3. Absolute advantage

   • define

   • which should each country spec in

   • what happens before trade and after

   • how does it increase living stds?

• Define- a country has absolute advantage over another country if it can produce a greater quantity of that good with its resources

• Before spec:

• aus produced at point A, 6 wheat, 2 coffee

• PNG produced at point B, 2 wheat, 6 coffee

• After spec:

• aus produced 10 wheat and 0 coffee

• PNG produced 0 wheat and 10 coffee

• No extra resources used by either country, but able to have outside the PPF of each

  

4. Comparative advantage

   • define

   • which has comparative advantage

   • what happened before and after?

• When a country has absolute advantage in production of both goods, comparative advantage occurs where its absolute advantage is greatest of absolute disadvantage is lowest.

• Australia OC of prod 1 wool suit = 0.5 computer (8/16), OC of 1 computer= 2 wool suits

• Japan OC of prod 1 computer= 1 wool suit and VV

• Before spec- japan prod 14 comp and 6 wool suits, aus prod 4 computer and 8 wool suits

• AFTER SPEC- japan prod computers as lower OC and prod only computers,  aus only prod wool suits.

  

5. Comp advantage using inputs

• determin OC of each country

6. Sources of comp advantage

   • determined by

   • examples

• quantity and quality of a nations, labour, natural, capital and econ progress

• eg. Brazil in coffee and sugar due to geographics

7. GAINS FROM EXPORTS ON D AND S OF COMP ADVANTAGE

• explain the graph ie. what is the exports

• what happens to producers and consumers?

• domestic price lower than WP

• aus has comp and should export

• supply increases, demand decreases

• Aus iron ore producers gain. Producer surplus increases by areas B, C, and F.

• Aus domestic consumers lose as CS decreases to just A.

• Areas B C and F are greater than area lose by CS= gains exceed losses.

  

 

8. GAINS FROM IMPORTS OF D AND S

• explain the graph

• what happens to producers and consumers

• WP is lower than domestic= not comp advantage

• imports of 100

• supply decreases but demand increases

• Domestic producers lose as PS decreases to just C, but CS increases + DE, thus gains from CS exceed losses from PS.

• D+E= net gains

  

9. Protection

   • define

   • goal

• any action by the gov designed to give domestic producers an artificial advantage over a foreign producer.

• Goal- increase domestic production in protected industries and decrease consumption of imported g and s.

  

9. Types of protection and eg.

1. Increasing domestic price of foreign products- tariffs

2. Providing domestic prod with COP advantage- subsidies

3. Quantative restriction on imports- quotas

9. who benefits from protection?

• Owners and workers in protected industries

• Government as tarrifs= increased rev.

  

9. who loses from protection

• Non protected industries- pay more for imported inputs = increased COP and less recources

• Consumers- decreased imports and exports mean they pay more for international g and s but decrease consumption

ALL FORMS OF PROTECTION = NET WELFARE LOSS FOR ECON AS LOSSES>GAIN

10. Tariffs

• define

• explain the graph

• what happens to consumers and producers

• thus

• WP is initially at SF

• Tarrif = increased supply from q1 to q3, but consumption decrease from q2 to q4.

• Imports decrease to Q3Q4

• Gov rev= e.

 

• CS decrease from abcdef to ab.

• PS increase from g to gc.

• e= gov rev

• D+F= DWL.

 

• Thus, domestic industries and govs gain but consumers lose as they pay more but receive less.

• Total surplus decreases and econ welfare decreases.

 

11. subsidies

    • define

    • explain the graph

    • what happens to consumers/ producers

1. grants or payments made by gov to producers to decrease a producers COP

2. Shifts supply curve from Sd to Ss= increase production but same COP from q1 to q3

3. Imports decrease to q3q2.

4. Cost of subsidy= DABW

5. PS= DACW.

6. THUS, cost of subsidy> PS= DWL of ABC.

7. Subsidy does not increase CS but increase PS, regardless welfare loss.

11. why are subsidies favoured> tarrifs?

    

• seen less restrictive as they don’t raise prices or decrease overall consumption

• Also favour local producers without upsetting consumers

 

12. ARGUMENTS FOR PROTECTION

    • list like 3

• antidumping

• infant industry

• national security

12. Describe antidumping

• when a company exports a product at a lower price than it normally is domestically

• foreign firms aim to drive out domestic firms as they may be big enough to run at a loss temporaily

• they do this as they may have large surplus of supply that are unable to be sold in their countries, thus they attempt to reduce losses

• by protecting against this, attempting to keep domestic business and jobs

12. Describe infant industry

• New firms may become accustoms to protections put in place to help them grow

• BUT decrease competition and may only be short term protection, also decreases incentive for innovation and efficiency

 

13. describe national security

• argued that import barriers are nessencary to protect vital industries in case of war time emergencys

• Problem is identifying which are nessecary as eveeryone could present a case

 

14. most recent trade war

• 2018- trump applied 25% tariffs on canada an mexican imports, 10% on china.

• why? to protect for national security, antidumping, to increase employment and decrease trade deficit.

• consumers paid more and increased COP= decreased prod and employ= potential recession