ecnomics topic 1

Topic 1 Block 1: Comparative Advantage & Free Trade

free trade is mutually beneficial even if one nation is less efficient at producing everything

Ricardo's theory stating nations maximize global output when specializing in goods with the lowest opportunity cost.

Chain: Tariff elimination → Specialisation in production for FDIs GVC → Global allocative efficiency increases → Lower consumer prices (Pw) → Real GDP growth.

Key stats: Global trade expanded 125-fold (125x) (1960-2020) making up ~50% of GWP; e.g ChAFTA eliminated tariffs on 96% of Aus exports to China.

Topic 1 Block 2: Methods of Protectionism & Distortions

protection creates market distortions by artificially altering prices, limiting supply, and reallocating economic resources away from global efficiency

Tariffs (import tax, raises Pw to Pt, creates government revenue & deadweight loss); . society miss on potential gains, no one else gets those lost benefits. (the total loss of efficentcy and economc welfare)

Subsidies (cash grants to local producers, keeps consumer price at Pw, direct cost to budget);

Quotas (physical import limits, creates artificial scarcity & price hikes, no gov revenue).

OECD Stat: Every $1 of tariff protection reduces GWP by 66 cents due to dynamic and allocative inefficiency.

Topic 1 Block 3: Arguments for Protectionism safeguard domestic jobs, nurture new industries, secure national defense capabilities, and stop unfair foreign trade practices like predatory pricing.

1. Infant Industry (temporary support for small scale firms to reach Economies of Scale/technical optimum; risk of dynamic inefficiency);

2. Prevention of Dumping (predatory pricing below production cost to eliminate local rivals);

3. Domestic Employment (short-term job protection, but locks resources into inefficient sectors);

4. strategic agruement: Defence/Self-Sufficiency (maintains critical capacity during global supply shocks). —> (protecting firms so we are not heavily reliant on others during GVC crisis or economic crisis.

Topic 1 Block 4: FDI, TNCs & Global Value Chains

deeply linked pillars of the modern world economy

FDI involves lasting management interest (10%+ voting equity) or physical setup. TNCs unbundle production via Global Value Chains (GVCs) and vertical specialisation.

Chain: FDI inflows → Tech transfer → GVC integration → Productive capacity (LR aggregate supply) increases → Real GDP growth.

Stats: Global FDI reached ~$1.6 Trillion; China attracted US$170B+ FDI into coastal SEZs. Risks: Tax avoidance via profit shifting and the Pollution Haven Hypothesis heavy-polluting industries to developing nations with lax regulations to lower production costs → bad 4 their eco

Topic 1 Block 5: Financial Integration & Foreign Deb

increased openness often expands foreign debt obligations (fiancial contaigens risks)

Financial market deregulation and capital mobility allow economies to fund domestic Savings-Investment Gaps, but heighten debt vulnerability.

Chain: Financial deregulation → Capital inflows → Foreign Debt/Equity accumulation → Debt servicing obligations (NPY deficit) → Exposure to financial contagion. bop issues (CAD) it is often a sign of a healthy, growing economy rather than a crisis

Stats: Aus Foreign Investment stock grew from $150B (1990) to $1.9T (2020). Risks: Debt traps, currency devaluations, and IMF structural adjustment conditions. (policy requirements attached to loans) IMF conditionality → must meet obligations to recive monetary assistance

Topic 1 Block 6: Globalisation, Development & Inequality

Globalisation drives economic development by connecting world markets, but it often widens wealth gaps

Economic growth (quantitative real GDP increase) is a prerequisite for economic development (qualitative HDI improvements in health/education).

Chain: Global integration → GDP growth → Gov tax revenue increases → allocates funds on efficent ecnomic development → Public spending on health/education → HDI increases → efficent ecnomy (education/skills)

Stats: Integrated trade reduced global extreme poverty by 60% since 1990; China lifted 800M+ from poverty (HDI ~0.77), but coastal SEZ growth pushed its Gini coefficient above 0.46.

Topic 1 Block 7: International Business Cycles & Transmission Channels

international trade, global supply chains, financial markets, and monetary policy spillovers e.g USA monetary bank affecting other nations IR%

Synchronized fluctuations in global economic output (GWP). Transmitted via 5 channels: Trade linkages, Financial flows, TNC investment, Exchange rates, and Confidence.

Chain: Global downturn → Foreign demand exports drops → Aggregate Demand drops → Domestic GDP contracts. → nation goes into recession

Stats: GWP contracted -0.1% in GFC (2009) and -3.1% in COVID (2020). RBA finding: ~63% of changes in Australian output are linked to foreign growth, inflation, and interest rate movements.

Topic 1 Block 8: International Economic Organisations (WTO, IMF, World Bank, OECD)

WTO enforces multilateral trade rules and dispute resolution (e.g., China tariffs fell 35% to 15% upon entry).

IMF maintains short-term global financial stability as a lender of last resort (e.g., €110B Greece bailout).

World Bank provides low-interest loans for long-term development infrastructure and debt relief (mostly for poor nations) (HIPC initiative). a comprehensive debt-relief program launched in 1996 by the International Monetary Fund (IMF) and the World Bank

OECD conducts policy research for high-income democracies. to increase social and ecnomic growth efficenties in the economies.

Topic 1 Block 9: Economic Forums & Regional Trading Blocs (APEC), (EU)

• (ecnomic forums) G20 coordinates global macroeconomic policy (e.g., $5T stimulus during 2008 GFC).

EU is a single market and monetary union with shared currency/ECB, but uses CAP subsidies to protect agriculture.

• APEC uses open regionalism to cut regional tariffs from 17% to 6%.

ASEAN/AANZFTA eliminated tariffs on 96% of Aus exports to SE Asia.

Topic 1 Block 10: Trade Creation vs Trade Diversion

are economic effects that happen when countries form a free trade area or a customs union

Trade Creation: Trade agreement removes barriers, shifting production from a high-cost domestic firm to a low-cost foreign member (Net Welfare Gain).

Trade Diversion: Preferential agreement shifts trade away from an efficient non-member producer to a higher-cost member producer because member goods enter duty-free (Net Welfare Loss).

Example: ChAFTA lowered tariffs for China but risks diverting trade from non-signatory South American exporters.

Topic 1 Block 11: Global Environmental Sustainability & Externalities

depends on addressing externalities—the hidden costs or benefits of production and consumption that are passed onto society or the planet without being reflected in market prices

Globalisation increases production scale, creating negative externalities (unpriced environmental damage like carbon emissions).

• Pollution Haven Hypothesis: TNCs relocate polluting manufacturing to developing nations with lax regulations.

• Concepts: Ecologically Sustainable Development and the Tragedy of the Commons (depletion of shared resources like clean air/oceans).

Examples: China's 2060 carbon neutrality target and Australia's Net Zero 2050 commitment.