Unit 2 AOS 2B: The economics of international trade

Absolute cost advantage

occurs when a nation is the cheapest or most efficient producer of a particular good or service in the world.

Australian Fair Work Commission

determines minimum legal wages and conditions for Australian workers to help avoid exploitation and ensure reasonable living standards.

The balance of trade or trade balance

is a financial account that records a country's total value of exports of goods and services (i.e. credits) minus the total value of imports of goods and services (i.e. debits), measured over a period of time. The trade balance may be a surplus, deficit or an exact balance.

The balance on goods and services (BOGS)

represents the total value of goods and services exported minus the total value of goods and services imported, measured over a period of time. See also the balance of trade.

Bilateral free trade agreements (FTAs)

are negotiated between two or more countries and involve the removal of industry protection such as tariffs.

Centralised minimum wage fixing system

involves the Australian Fair Work Commission determining the minimum pay and conditions.

Comparative cost advantage

occurs when a nation specialises in the production of those goods and services where it is relatively most efficient or where its cost disadvantages are least, thereby raising incomes and material living standards, and minimising opportunity costs.

The composition of trade

deals with the type of goods and services exported and imported. Australia's trade is composed of goods such as minerals and primary products.

Deregulation of the labour market

means that there is less government interference in how wages are determined in the labour market, and more reliance on the conditions of demand and supply of labour and the process of enterprise bargaining. Often, higher wages are linked to increases in efficiency.

Economies of large-scale production

can occur when a firm produces on a large scale that enables it to spread its fixed production costs (i.e. costs that do not rise much as output increases including research, advertising, product development, some aspects of management and, up to a point, equipment) more thinly over a greater volume of sales. Growing export markets through freer trade allows local firms to gain more economies of large scale, reduce average unit costs and expand output, employment and incomes.

Enterprise bargaining

is a more flexible alternative to centralised wage fixing and involves negotiations between workers and their boss on a firm-by-firm basis, with pay rises usually reflecting worker efficiency or productivity.

The exchange rate

represents the price of one nation's currency when it is swapped for another in the foreign exchange market. It is determined by the number of buyers relative to the number of sellers of a currency, and may rise (called an appreciation) or fall (called a depreciation) due to changes in the demand for the currency by buyers relative to its supply by sellers.

Foreign exchange market

is where buyers (D) and sellers (S) of foreign currencies negotiate the rate at which one nation's currency is swapped for another's. The price or exchange rate for each nation's currency is continually responding to market forces, reflecting the currency's relative scarcity.

Free trade

is the opposite government policy to protection. It exists when there are no tariffs, subsidies, quotas or other restrictions on the movement of goods, services and capital between countries. It encourages countries to specialise in areas of comparative cost advantage and to allocate resources more efficiently.

Import quotas

represent quantity limits imposed by the government on the importation of particular types of goods (such as cars, cheese and textiles) and services from abroad.

Infrastructure

provides the services (like roads, railways, water, power and ports) used by producers of goods and services and the general community. It facilitates production and grows a nation's productive capacity.

International economics

looks at why countries trade, the patterns of trade, how we measure international trade, the factors that can influence trade levels, and how government policies can affect global trade.

International trade

involves a nation exporting and importing goods and services. Transactions are recorded on an account called the balance of trade.

Protectionism

is the opposite to the policy of free trade. It involves the government using barriers to trade such as tariffs, subsidies and import quotas to limit competition and the inflow of goods from other countries. Supporters often justify the use of protection by arguing that it creates jobs, supports infant industries, and strengthens supply chains and national defence.

Specialisation in production

occurs when a nation concentrates on making those goods and/or services where it is relatively most efficient, given the resources available.

Structural change

by businesses often involves finding ways of cutting production costs, lifting worker efficiency, and sometimes closing down or relocating business operations.

Subsidies

are government cash payments or tax concessions made to local producers to make them more internationally competitive by covering some of their production costs.

Tariffs

are an important trade protectionist policy. They represent an indirect tax added onto the price of selected imports to increase the price of imports relative to the locally made good. As a barrier, it makes foreign goods relatively less attractive to local consumers, but they can reduce efficiency in resource allocation.

Trade liberalisation

occurs when governments gradually reduce their protection of local industry by cutting tariffs on imports, abolishing quotas or quantity controls on particular types of imports, and lowering the payment of subsidies to local firms.

Trade wars

occur when one country increases its level of protectionism by imposing higher tariffs and other restrictions to limit the value of imports coming in from another country, leading to further rounds of retaliatory rises in tariffs. A recent example of this is the 2018-20 trade war between the US and China, where the US imposed higher tariffs on over $450 billion of Chinese goods imported into the USA. China did the same by raising its tariffs on US goods.

International competitiveness

involves local firms and producers being able to sell their comparable quality goods and services at prices that are relatively low and relatively attractive against those charged by overseas rivals. International competitiveness may be affected by variables like wage costs, productivity, costs of utilities, tax rates on companies, the exchange rate, transport costs and government red tape. Local firms often need to cut their production costs, improve quality, widen their product range, and raise efficiency in production and marketing to become more internationally competitive. See microeconomic reforms.