Topic 1

Question 1

Define open and closed economies

Answer 1

Open economy - has the five sector model economy, as they have international trade

Closed economy - only has a four sector model, do not internationally trade

Question 2

What happens in an open economy

Answer 2

Means more than trading with other countries

Means free trade - gets rid of trade barriers that make
trade hard. For example, protectionism (i.e., tariff taxation and quoters)

Question 3

What are the advantages of international trade?

Answer 3

Consumer advantage:
- greater choice/ variety of goods and services, lower prices as result of more competition

• benefit from lower prices providing a higher standard of living due to increased efficiency and production.

Australian exporter advantage:
- have a much bigger market
- allows for increased specialisation and larger production resulting in benefits of economies of scale (lower cost per unit)

• increases export related jobs
• overall improved sustainable economic growth and productivity due to access to better technology, capital equipment, methods of production
• better access to global markets, helping developing countries growth e.g. China and India

Question 4

What are the disadvantages of international trade?

Answer 4

• Import competing companies (small or local businesses) face stronger competition and many may not survive - causes unemployment i.e., Australia’s motor vehicle industry
• Poor political relations (China) or world instability (GFC, COVID, war) can disrupt trade and supply lines and create supply shortages/ increase cost of materials
• Both negatively impact Australia’s sustainable economic growth

Question 5

What are reasons to trade?

Answer 5

Trade matters to Australia because 1/5 jobs in Australia are related to trade

It is 20% of Australia’s GDP

Australians working in the export industry are paid on average 60% more than other working Australians.

Opening Australian markets to more trade had made households $3,900 better off

Australia’s two way trade in goods and services was worth around $700 billion in 2018 - a vital component of Australia’s economic prosperity

Question 6

What traditionally was the composition of Australia’s trade, and why was this an issue?

Answer 6

Traditionally Australia relied on agricultural exports

This caused issues:
- Very susceptible to floods/ droughts - climate issues

• Low world prices (must accept prevailing market price of agricultural goods)
• Oversupply
• Low value added products (low profit margin)

Question 7

Define Price takers / Price makers.

Answer 7

Price takers must accept the prevailing market price and sell each unit at the same market price - found in perfectly competitive markets.

Price makers are able to influence the market price and enjoy pricing power.

Question 8

What is Australia’s primary product other than agriculture?

Answer 8

Agricultural issued forced Australia to move to another primary product, mining:

• Have a comparative advantage in the production commodity goods
  Agriculture and mining = 2/3 of Net-Exports (mainly iron-ore, coal)

Question 9

What is another important component of exports?

Answer 9

Services:
- Also a very important component to exports

• Are the growth area particularly to Asia
• Australia has a skilled and educated workforce thus education, financial, insurance, tourism , health and communications are in demand.

Question 10

Why does Australia import large amount of manufacturing instead of producing themselves?

Answer 10

• Cost of labour is too high
• Have a close proximity to markers
• High exchange rate
• EOS
• Competitive market from countries like China, India and Thailand with low labour costs

Question 11

What is the direction of Australia’s trade?

Answer 11

AUS traditionally traded with UK / European countries up to 1950s

In 1973 the UK joined the EU and thus AUS lost preferential treatment economically and subsequently gravitated towards USA and Japan

In the 1960s Japan was rapidly growing and demanded the resources AUS had - minerals, energy and food

Japan became our biggest exporter and had a POS balance of trade ( X > M)

In the 1990s Japan’s growth was becoming weak and Australia turned towards emerging Asian nations - like Taiwan, Singapore because of proximity and emerging growth

By 2007 China became our largest trading partner

By 2019 approx. 1/3 of commodity exports go to China and growth in trade

East Asia dominates direction of exports
Almost 30% of exports are for China

Question 12

What are the issues with trading with China and United States?

Answer 12

Economic issues are created with China because of political tension and strains

 United states is not a good trading partner as M > X (large trade deficit)

Question 13

What countries does Australia have a positive trade relationship with? (trade surplus)

Answer 13

AUS have pos (X > M) economic relations with India, China, NZ and Japan

Question 14

How do you calculate change in trade?

Answer 14

Change in trade x 100 / previous figure

Change in trade = current figure - previous figure

Question 15

Define terms of trade.

Answer 15

the ratio of an index of a country’s export prices to an index of its import prices

Question 16

What does terms of trade mean for economic relationships

Answer 16

If this index increases it implies Australia is receiving relatively more for its exports (better off - referred to as favourable moments in terms of trade)

If price of exports increases, but the price of imports remain constant - a positive terms of trade

If this index decreases it implies Australia is receiving relatively less

A fall in terms of trade implies Australia must export more goods and services to maintain the same level of imports

Question 17

What is the basic premise behind theories of trade?

Answer 17

Specialisation allows a country to create better quality products in greater quantity. Specialisation and trade (imports and exports) help output and satisfy wants.

Question 18

Explain the absolute advantage of trade.

Answer 18

• First founded by Adam Smith
• Developed the idea of specialisation - the product which a country specialises in is their absolute advantage

The theory of Absolute Advantage is based on which country can most efficiently produce a good

Question 19

How can you demonstrate absolute advantage?

Answer 19

Absolute advantage –> greatest quality/ quantity

The country with the higher quantity in a PPF or table has the absolute advantage

Absolute advantage = best efficiency (through specialisation)

Question 20

What is the benefit that specialisation and trade offer?

Answer 20

• Efficiency gains are reflected in production with specialisation
• If trade takes place after specialisation both countries will benefit
• The benefit that specialisation and trade offer is that both countries taken together produce a greater total output of both goods

Question 21

Why is it necessary to trade?

Answer 21

(a) import goods and services that we either can’t produce at all or can’t produce cheaply enough

(b) export goods and services that can’t be produced overseas or that we produce more efficiently.

Question 22

When is a country said to have absolute advantage?

Answer 22

A country is said to have absolute advantage if they can produce the same good using fewer resources than another country.

In addition, if the country can produce the most output using a given set of resources, they also have absolute advantage.

Question 23

What are the assumptions in the absolute advantage model (PPC)?

Answer 23

• There are only two countries in the model
• Each country only produces the two commodities (goods or service)
• Each country has the same quantity of resources, but not the same quality
• The resources are perfectly mobile, i.e., can be moved from one industry to another
• Where trade occurs there are no transfer costs

Question 24

Explain the theory of comparative advantage

Answer 24

• David Ricardo’s theory of comparative advantage (1817) argues that nations may benefit from specialisation and trade
• Even in cases when one nation has an absolute advantage over another nation in the production of all commodities.
• Based not on efficiency but on opportunity cost
• Even if one country can produce everything cheaper than another country, both countries can still benefit from this specialisation and trade.
• The theory of comparative advantage is based on which country can produce a goods at the lowest opportunity cost

Question 25

Define the theory of comparative advantage

Answer 25

Countries should specialise and trade in the production of those goods and services that they have the lowest opportunity cost in and then trade with other nations in order to maximise the well being of both countries. This means that even if a country can produce all goods more efficiently than another country (absolute advantage) both countries will still benefit from trade by specialising in those goods that have the lowest opportunity cost.

Question 26

How does a country's economy benefit from specialisation in the production of one or a few goods and services?

Answer 26

- Economies of scale – lower cost/unit due to large scale production - Greater efficiency in the use of factors of production - Less wastage & duplication

Question 27

Explain the theory of competitive advantage

Answer 27

- The theory of competitive advantage claims that benefits are obtained through the capacity of a nation's industries to innovate and upgrade - This theory was devised by Michael Porter in 1990 - The theory argues that a nation's prosperity is created, not inherited - Ported stated a national competitiveness depends on the capacity of its industry to innovate and upgrade

Question 28

What are the four factors of Porter's Diamonds?

Answer 28

Factor conditions, Demand conditions, relating and supporting industries and film, strategy and rivalry

Question 29

Explain the factor conditions of Porter's Diamond

Answer 29

- The nation must have an advantage in factors of production (skill labour or infrastructure) - Porter argues that nations do not to be well endowed with the factors - They can be created through investment for infrastructure and a highly specialised trained workforce

Question 30

Explain the demand conditions of Porter's Diamond

Answer 30

- The nation can benefit from having a clear view of consumer demand - First develops a domestic market to help anticipate international market needs. - Choose something that people actually want

Question 31

Explain Related and Supporting Industries of Porter's Diamond

Answer 31

- A nation can gain an advantage by have efficient and internationally competitive supplier industries - Make sure you have supporting industries (if building cars, you need supporting industries of motors, parts etc.

Question 32

Explain Film, Strategy and Rivalry of Porter's Diamond

Answer 32

- Conditions governing company creation, organised management and domestic rivalry needs to be more disciplined, flexible and supportive of innovation. - Should be flexible and trying to be ahead of the game (keep rivals out)

Question 33

Define globalisation

Answer 33

The increasing convergence and interdependence of national economies to form one single global economy This involves the integration between different economies and the increased impact of international influences on all aspects of life and economic activity Global economic activity involves the trade of commodities, financial flows, global investment, TNC, technology, communication and labour

Question 34

Define a multinational Corporation (MNC)

Answer 34

A business that operated in several countries; it generally has a base country (parent company) Usually a company that generated 25% or more of its revenue from overseas competition is considered a multinational Multinationals generate a good deal of foreign investment revenue from their subsidiary companies They have many offices to take advantage of economic conditions like - local demand conditions, labour supply, taxation benefits, emerging economies (like China) and to avoid protectionist barriers

Question 35

What do multinational supply chains consist of?

Answer 35

- Refers to their system of organisation, people, information, resources involved in moving a commodity or service from supplier to consumer - Involves all the steps from attaining the raw materials, transformation process and final product - Simply due to their large size, have complex supply chains - 90% of the world's global demand is met through international goods and services

Question 36

What are factors which contribute to the growth of multinationals ?

Answer 36

1. Location of natural resources 2. Advances in technology 3. Infrastructure and transport facilities 4. Government incentives

Question 37

What are ethical issues concerned with multinational supply chains ?

Answer 37

- Studies show that supply chains for multinational corporations fail to detect serious signs of abuse - Like slave labour, child labour and human trafficking - Corporations have designed a system of self-regulation which allows their suppliers to cover up abuses and easily cheat a weak inspection system - Supply chain audits are ineffective tools for detecting, reporting or correcting environmental and labour problems

Question 38

How does technological trade contribute to globalisation (expanding international trade)?

Answer 38

Technological advancements help improve transportation and the efficiency of communication Contribution: - Faster and cheaper flow of people, product and ideas - MNCs can more efficiently manage and coordinate production across a number of countries - Opened new opportunities to access resources in other countries - Improved transport allow the benefit of cheaper and faster production. This allows production supply chains to be spread over a number of countries yet still be efficient (time and cost)

Question 39

How do trading blocks contribute to globalisation (expanding international trade)?

Answer 39

- Trading blocks facilitate trade by removing tariffs, quotas and tax instead providing preferential treatment - Results in increased global production, exchange of technologies and lower prices For example: Australia's part in APEC has led to the negotiation of several bi-lateral trade agreements which provide AUS greater access to the growing Asia area (expanding exports) An economic union is considered one of the different types of trade blocs and refers to an agreement between countries that allow products, services and workers to cross borders freely

Question 40

Define an economic union

Answer 40

Economic unions require the integration of monetary and fiscal policies so that member countries can coordinate policies, taxation and government spending relating to this - Also use a common currency that comes with fixed exchange rates - Participant countries have common policies on product regulation, freedom of movement of goods, services and the factors of production (capital and labour) and a common external trade policy - I.e., European Union

Question 41

What is the primary purpose of APEC (Asia Pacific Economic Cooperation)?

Answer 41

- APEC's primary purpose is to facilitate economic growth and prosperity in the region - Have the vision of creating a seamless regional economy - They pursue these objectives through trade and investment liberalisation, business facilitation and economic and technical cooperation - APEC aims to strengthen regional economic integration by removing impediments to trade and investment - Also aim to enhance supply chain connectivity across the border and improve the business environment - Endeavours to improve the operating environment for businesses by reducing the cost of cross-border trade and improving access to trade information and simplifying regulatory and administrative processes

Question 42

Name two bilateral free trade agreements Australia participates in

Answer 42

CERTA (Closer Economic Relations Trade Agreement) - Bi lateral agreement between Australian and NZ - Extended to uniform business regulations and taxation laws - Increase in trade 8% CHAFTA (China Australia Free Trade Agreement) - Came into force on 20 December 2015 - It lays historic foundation for the next phase of Australia's economic relationship with China - The agreement unlocks significant opportunities for Australia in China

Question 43

How do free trade agreements benefit the global economy

Answer 43

- FTAs foster freer trade flows and create stronger ties with our trading partners. - FTAs don't just eliminate tariffs, they also address behind-the-border barriers that impede the flow of goods and services between parties, encourage investment, enhance cooperation, and can address other issues, such as intellectual property, e-commerce and government procurement. - FTAs promote regional economic integration and build shared approaches to trade and investment, including through the adoption of common Rules of Origin and through broader acceptance of product standards.

Question 44

Define a Free Trade Agreement

Answer 44

A FTA is an international treaty which removes barriers to trade and facilitates stronger trade and commercial ties, contributing to increased economic integration between participating countries.

Question 45

How do free trade agreements benefit the Australian Economy?

Answer 45

- FTAs open up opportunities for Australian exporters and investors to expand their businesses into key overseas markets. - FTAs can improve market access across all areas of trade — goods, services and investment — and help to maintain and stimulate the competitiveness of Australian firms. - FTAs can increase Australia's productivity and contribute to higher GDP growth by allowing domestic businesses access to cheaper inputs, introducing new technologies, and fostering competition and innovation. - FTAs can enhance the competitiveness of Australian exports in the partner market, and add to the attractiveness of Australia as an investment destination

Question 46

How does deregulation contribute to globalisation (expanding international trade)?

Answer 46

- Refers to the loosening or removal of government controls over business activity - This has happened in Australia's banking sector and telecommunications. Internationally has happened on environmental controls, wages, health and safety standards etc. - Financial deregulation of banking sector and labour markets (enterprise bargaining) to promote more competition, productivity, efficient resource use, lower consumer prices, increased international competitiveness. - Governments impose barriers to trade protectionism for economic and political reasons - Deregulation is removing these barriers on the free flow of trade and investment

Question 47

Explain the World Trade Organisation

Answer 47

- The World Trade Organization (WTO) is the only global international organization dealing with the rules of trade between nations. - At its heart are the WTO agreements, negotiated and signed by the bulk of the world’s trading nations and ratified in their parliaments. - The goal is to help producers of goods and services, exporters, and importers conduct their business. - The WTO promotes sustainable economic development through promoting free trade having desirable effects on the world economy, facilitating trade negotiations, and settling trade disputes

Question 48

How do MNCs contribute to globalisation (expanding international trade)?

Answer 48

- Gain a competitive advantage by locating operations in other countries where they have a comparative advantage in specific areas of operations - This may include locating production in a country that has accessible resources / locating in a country that has a low cost labour - Are responsible for greatly increasing the level of Foreign Investment around the globe over the last 20 years - Host governments tend to regulate foreign investment because MNCs agenda or policies may conflict with the government

Question 49

How does changed political and development strategies contribute to globalisation (expanding international trade)?

Answer 49

- The global economy has become more open over the last few decades Vietnam, China, Cuba and Eastern Europe have all opened up to international trade Other countries like Hong-Kong, Korea, Singapore and Taiwan have emerged and have export focused production These economies have been developing rapidly > these economies are called emerging market economies . Their emergence has created a much larger global world market for trade

Question 50

How do global organisations contribute to globalisation (expanding international trade)?

Answer 50

World Trade Organisation -The goal is to help producers of commodities, exporters and importers conduct their business and set out rules of fair trade International Monetary Fund - working to foster global monetary cooperating, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty world-wide United Nations- has the central mission of maintenance of international peace and security which is done by working to prevent conflict, helping parties in conflict to make peace & other peace keeping missions Organisation for Economic Co-operation and Development - promotes trade in market economies providing a platform to compare government policy, identify good practices and coordinate domestic and international policies of its members World Bank - An international financial institution that provides loans and grants to the government of poorer countries for the purpose of pursuing capital projects

Question 51

Define a gold exchange standard

Answer 51

a monetary system under which a nation's currency may be converted into bills of exchange drawn on a country whose currency is convertible into gold at a stable rate of exchange.

Question 52

Define a trade weighted index

Answer 52

known as the real broad index, measures the strength of the US dollar relative to the currencies of the nation's trading partner

Question 53

Explain exchange rates

Answer 53

Exchange rate is simply defined as the value of a currency expressed in the terms of another nation's currency - the conversion between currency is a complexity faced in trade

Question 54

Why do different economies have different exchange rates?

Answer 54

- these rates reflect the state of the economy i.e., the US exchange rate is higher than others because they have an affluent and rich economy - high demand in their country and thus higher exchange rate - Interest rates, high interests rates attract foreign investors . Cost structure of the economy i.e., wages, taxes, inflation - More developed countries have the better exchange rates

Question 55

Define appreciation and depreciation

Answer 55

Appreciation - the increase in the value of a currency relative to other currencies under a floating exchange regime. Appreciation of the dollar reduces the price of imports (good) but increases the price of exports (bad) Depreciation - the decrease in the value of a currency relative to other currencies under a floating exchange regime. A depreciation of the AUS $ increases the price of imports but decreases the price of exports

Question 56

Identify the types of exchange rates

Answer 56

Fixed exchange rates: a system where the value of a currency is a set value - only the government has the right to devalue or revalue the currency Floating exchange system: a system by which the exchange rate for a currency is determined by the force of supply and demand. Dirty Flow exchange system: 'Dirty flow' is a managed exchange rate which is in between a floating and fixed exchange system. Basically is based on supply and demand, but the RBA can intervene in the market at time of exchange rate instability by buying or selling Australian $

Question 57

What are the factors affecting the demand of Australian Dollars

Answer 57

Australian exports must be bought with Australian dollars An increase in demand for Australian imports thus results in an appreciation of the dollar as there is more foreign demand for the Australian dollar (for the exports in which they import) Australia must maintain international competitiveness - the more competitive and efficient the economy is the lower the cost to consumers and thus increased demand for exports Global conditions like the GWP (gross world product) increasing allows Australia to benefit from a developing economy like China's growth If the GWP is low like in the global financial crisis then demand for Australian exports decrease Australia's inflation rate impacts demand because the consumer price index means lower price, increasing number of exports and demand Capital inflow impacts demand due to investment in Australia which is largely determined by relative interest rates and investor confidence Speculation that the Australian dollar will appreciate encourages an increase in demand for the Australian dollar i.e., through investment

Question 58

What are the factors affecting the supply of Australian Dollars

Answer 58

Demand for imports leads to an increase in supply of Australian dollars as consumers will exchange AUD for foreign currency This demand for imports is determined by the inflation rates in Australia relative to those overseas and the competitiveness of domestic firms Capital outflow affects supply due to investment overseas which is largely determined by investment opportunities available and relative interest rates attainable overseas Speculation that the Australian dollar will depreciate causes an increase of supply of the AUD because consumers will then sell AUD for other currencies.