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PART 6: AUSTRALIA IN THE INTERNATIONAL ECONOMY Chapter 12: Australia’s international trade

PART 6: AUSTRALIA IN THE INTERNATIONAL ECONOMY Chapter 12: Australia’s international trade. Goods. Services. A$. FDI. Benefits of exporting goods and services. Increased employment Specialisation, economies of scale

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PART 6: AUSTRALIA IN THE INTERNATIONAL ECONOMY Chapter 12: Australia’s international trade

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  1. PART 6: AUSTRALIA IN THE INTERNATIONAL ECONOMY Chapter 12: Australia’s international trade Goods Services A$ FDI

  2. Benefits of exporting goods and services • Increased employment • Specialisation, economies of scale • Export firms able to divert greater funds into the development of existing land, plant and machinery

  3. Reasons for Imports • Goods cannot be produced within the country • Lack of resources and/or technology • Goods can be produced, but not in sufficient quantities (e.g. oil) • Goods are available more cheaply overseas (e.g. electrical/electronics goods) • Benefits: quality enhancement, increase in efficiency and competitiveness for local goods, higher standard of living

  4. Theories of International Trade:Absolute Advantage • The exporting country holds a superiority in the availability of certain goods because of • Climate, quality of land and natural resources • Differences in labour, capital, technology and entrepreneurship

  5. Theories of International Trade: Theory of Comparative Advantage • David Ricardo (1817) • One country has a comparative advantage over another in the production of a certain commodity if its opportunity of producing that commodity is lower

  6. Alternative Production Possibilities(100 Units of Resources) • Australia has an absolute advantage in both goods (see example in text, p. 211) • On a relative basis Australia’s comparative advantage is greatest in cheese (2.5 to 1 versus 1.33 to 1) • The United Kingdom’s comparative disadvantage is least in cloth (1 to 1.33 versus 1 to 2.5 for cheese)

  7. Trade Under Constant Opportunity Costs Opportunity cost Australia United Kingdom 1 kg cheese = 0.80 m cloth 1.5 m cloth 1 m cloth = 1.25 kg cheese 0.67 kg cheese • Trade ratio: 1 kg of cheese = 1 m of cloth • Australia’s benefit: domestic opportunity cost for 1 m cloth is 1.25 kg of cheese (> 1) • United Kingdom can procure 1 kg of cheese for 1 m cloth (> 0.67)

  8. Factor Endowments(Heckscher and Ohlin) • Explains differences in opportunity costs • Factor endowment: a country’s share of factors of production (e.g. land, capital, labour, enterprise) • Countries will specialise in those goods that make more intensive use of the abundant/cheap factors • Cheese: land intensive • Cloth: labour intensive • Australia–Japan trade patterns (land intensive versus capital-intensive goods)

  9. Limitations of the Trade Theory • The theory disregards a number of considerations: • The difficulty in moving resources in the desired industries • Fluctuations in demand • Trade barriers • Other political restraints

  10. Exports of Goods and Services as a % of GDP, %, 2001 Source: Compiled from World Bank, World Development Indicators, 2003 and World Development Report 1994.

  11. Australia’s Rankings and % Share of World Trade 1980, 2003 Source: Adapted from WTO, International Trade Statistics, 1990 and 2004.

  12. Changes in Product Composition of Exports, Australia, 1979–80, 2002–03 (%) *ABS three-year average Financial years Adapted from Table 12.5, Economics for Business 3e, p. 216. Source: ABS, Balance of Payments and International Investment Position data, cat. no. 5302.0.

  13. Composition of Australia’s Merchandise Imports, A$ Bill, % Source: Compiled from Australian Bureau of Statistics, cat. no. 5302.0.

  14. Geographic Distribution of Australia’s Merchandise Exports, 1969 to 1972, 1995 to 1997, 2000 to 2002, % Source: Adapted from the Australian Bureau of Statistics data.

  15. Australia’s major merchandise trade partners, % of total, 2002 Source: Adapted from the Australian Bureau of Statistics data.

  16. 20.0 18.0 16.0 14.0 12.0 10.0 US$ billion 8.0 6.0 4.0 2.0 0.0 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 Exports Imports Australia’s services trade, US$ billion, 1992 to 2002 Source: Adapted from World Trade Organization, 2002 International Trade Statistics.

  17. Australian Trade Policies: Export Promotion • Multilateral negotiations within GATT/WTO • ‘The Cairns Group’ • Regional initiatives (e.g. APEC) • Bilateral agreements (e.g. New Zealand, United States, Singapore) • Trade promotion and publicity (AUSTRADE) • Export incentives (e.g. export grants, MiB scheme)

  18. Import Protection The nominal rate of assistance (NRA) The effective rate of assistance (ERA) (cont.)

  19. Import Protection (cont.) • Arguments pro-protection • The ‘infant industry’ argument • The ‘self-sufficiency’ argument • The ‘employment’ argument • Arguments against protection • Insufficient allocation of resources • Income redistribution • Well-being reduction Current government policies on protection • Tariff debate • Industry assistance

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