trade liberalization

Question 1

international trade

Answer 1

involves a nation exporting and importing goods and services.

Question 2

why do countries trade?

Answer 2

• lower prices
• greater choice for consumers
• economies of scale

Question 3

lower prices

Answer 3

means purchasing power increases so people can get access to more goods and services

results from 3 seperate factors
1. competitive advantage
2. cheaper inputs/outputs
3. increased competition

Question 4

lower prices- competitive advantage

Answer 4

Definition: When a country can produce a good or service at a lower cost or more efficiently than other countries.

Reason: Caused by differences in resources, labour, skills, or technology.

Example:

Australia → produces iron ore cheaply due to natural resources.

Southeast Asia → produces manufactured goods cheaply due to lower labour costs.

Result: Countries specialise in what they’re best at making.

Outcome:

Goods are made where it’s cheapest → lower prices for consumers.

Leads to more trade, higher incomes, and better living standards globally.

Question 5

lower prices - access to cheaper inputs/supplies for suppliers

Answer 5

If local suppliers can purchase land labour and capital eg inputs – equipment like machines, ingredients, consumables –more cheaply from overseas than for local suppliers, they can minimize production costs and
therefore drop their prices

Question 6

lower prices- impact of competition

Answer 6

International trade also means there are extra buyers and sellers in the market – not only domestic buyers and sellers but off-shore ones as well

This increased competition forces suppliers to continually improve their game; being more efficient, lowering costs, improving products and lowering prices

Question 7

greater choice for consumers

Answer 7

So consumers can access the latest and best products and, if competition works effectively, at the lowest prices

Question 8

how does great choice for consumers benefit living standards?

Answer 8

material – choice means competition among suppliers which leads to lower prices

non-material – consuming products that are made offshore and which cannot be made here
increases consumer satisfaction

Question 9

ability of businesses to achieve economies of scale

Answer 9

Economies of scale refers to the reduction in a business’ costs per unit caused by increases in the volume of output.

Question 10

exports

Answer 10

goods and services produced in Australia and sold to an overseas purchaser

Question 11

imports

Answer 11

goods and services produced overseas and sold to Australian purchasers

Question 12

balance of payments (BoP)

Answer 12

a summary of the value of transactions between residents and non-residents during a period of time

Question 13

current account

Answer 13

shows international trade of products. It records the value of the flow of goods and services between Australian residents and the rest of the world- reported quarterly by the ABS

Question 14

2 parts of current account

Answer 14

1. balance of merchandise trade (net goods)
2. net services

Question 15

CA 1 balance of merchandise trade

Answer 15

Merchandise export receipts less
merchandise import payments

This is essentially the difference between the value of goods we
export and the value of goods we import

Question 16

CA 2 net services

Answer 16

service export receipts less services import payments

The difference between the value of services we export and import

Values are significantly lower than goods/merchandise

Question 17

exchange rates

Answer 17

The value of an Australian dollar (AUD) compared to the value of something
else

Question 18

trade weighted index

Answer 18

TWI - The average value of AUD compared to a weighted basket of foreign currencies of Australia’s major trading partners

Question 19

impact of change in value of AUD on exports

Answer 19

When the AUD gets stronger, when it appreciates, people overseas have to pay more for Australian exports – they have to hand over more of their currency in order to get the same amount of A$

A stronger AUD makes Aussie exports more expensive for overseas
buyers

A weaker AUD makes Aussie exports cheaper for overseas buyers

Question 20

impact of change in value of AUD on imports

Answer 20

When the AUD gets stronger, when it appreciates, Australians have to pay less for imports –
they have to hand over fewer AUD in order to get the same amount of overseas currency

A stronger AUD makes imports cheaper for Aussie buyers

A weaker AUD makes imports more expensive for Aussie buyers

Question 21

factors that drive the value of the exchange rate

Answer 21

Demand for exports and imports

Foreign investment in Australian businesses

Relative interest rates

Question 22

demand for exports and imports effect on exchange rate

Answer 22

If Australia exports more, when exports rise, the demand for AUD will
rise – more people will need to get AUD in order to pay Aussie
exporters for their stuff from Australia – so if more overseas kids wanna
go to Monash, they they to buy AUD to pay for their fees – so demand
for AUD ↑ - and if demand ↑, price ↑

Conversely, if imports into Australia rise, it means Australians will
increase their demand for overseas currency in order to buy these
imports; in order to buy overseas currency, we have to exchange or sell
more AUD – and if we increase the quantity of anything being sold, its
price falls

Question 23

what drives demand for exports and imports

Answer 23

exports driven by things like
- economic rates of growth overseas
- relative prices - if relative prices of Aussie exports fall, demand for them will rise

imports driven by things like
- domestic growth rates
- relative prices – if relative prices of imports fall, demand for them will rise

Question 24

foreign investment in australian businesses

Answer 24

When someone invests in Australian equity (when someone overseas buys shares or invests in an australian business) they need to buy AUD – this increases demand for AUD and therefore increases exchange rate

Question 25

relative interest rates

Answer 25

the general level of interest rates in Australia compared to interest rate levels overseas If interest rates in Australia rise compared to those overseas, it means investments in AUD debt will deliver a higher return to investors – those who buy AUD and then lend those AUD to Aussie borrowers will get a higher return because interest rates have risen more here than in other currencies This will increase demand for the AUD and therefore increase the value of the AUD Similarly, if interest rates in Australia fall compared to other countries, investors will shift their capital out of AUD and into currencies where they can get a higher return for their capital. This will reduced demand for AUD so it will decrease the value of the AUD

Question 26

trade liberalization

Answer 26

removal of policies, such as tariffs, that inhibit free trade

Question 27

tarriffs

Answer 27

are an indirect tax imposed on imports

Question 28

import quotas

Answer 28

restrictions on the volume of imported products allowed

Question 29

subsidies

Answer 29

cash payments to local producers that help to lower production costs

Question 30

free trade agreements

Answer 30

These agreements involve countries agreeing to remove trade barriers and try to promote free trade with each other

Question 31

what australia exports + largest customers

Answer 31

iron ore, coal customers are china and japan

Question 32

what australia imports + largest consumers

Answer 32

personal travel, refined petrol china and usa

Question 33

australias exporter customers

Answer 33

BHP group, Rio tinto

Question 34

short term benefits of trade liberalisation

Answer 34

Cheaper imports- tarrifs removed, greater choice, higher living standards- from greater choice/competition

Question 35

long term benefits of trade liberalisation

Answer 35

international competitiveness, bigger markets- economies of scale , economic growth- level of production increase for local producers e can now sell overseas too, Local producers improve, become internationally competitive, improve quality and decrease prices