International Trade and Globalisation - TCE Economics (Tasmania)
“Explain the basis for international trade and evaluate the effects of globalisation, protection and exchange rates on the Australian economy.”
Nations trade because specialisation according to comparative advantage lets the world produce and consume more. Globalisation has opened Australia to trade, investment and finance, bringing gains in efficiency and choice as well as costs from greater exposure to global shocks.
What this dot point is asking
International trade lets countries buy and sell goods, services and capital across borders. The economic case for trade rests on the theory of comparative advantage.
Comparative advantage and gains from trade
Comparative advantage means a country should specialise in producing the goods it can make at the lowest opportunity cost, then trade for the rest. Even if one country is better at producing everything (absolute advantage), both still gain by specialising where their relative cost is lowest. Australia has a comparative advantage in resources such as iron ore, coal, natural gas and agricultural products, which dominate our exports, while we import manufactured goods and many services. Specialisation raises total output, lowers prices, widens consumer choice and allows economies of scale.
The ability of a country to produce a good at a lower opportunity cost than another country, which forms the basis for mutually beneficial specialisation and trade.
Protection
Protection refers to government policies that shield domestic industries from foreign competition. The main methods are:
- Tariffs: a tax on imports that raises their price, protecting local producers but raising prices for consumers and creating inefficiency.
- Subsidies: payments to domestic producers that lower their costs.
- Import quotas: limits on the quantity of a good that can be imported.
Arguments for protection include defending infant industries, saving jobs and national security. Arguments against are that protection raises prices, props up inefficient firms, invites retaliation and reduces the gains from trade. Since the 1980s Australia has substantially reduced tariffs and embraced freer trade, and it has signed many free trade agreements, for example with China, Japan, Korea and through regional deals.
Australia is a relatively open, trade-exposed economy. Trade liberalisation since the 1980s, including large tariff cuts, has reshaped the economy toward resources and services and away from protected manufacturing.
The balance of payments
The balance of payments records all transactions between Australia and the rest of the world. It has two parts. The current account records trade in goods and services, plus primary income (such as interest and dividends) and secondary income. The capital and financial account records flows of investment and borrowing. The terms of trade, the ratio of export prices to import prices, strongly affect Australia's national income; a commodity boom that lifts export prices improves the terms of trade.
Exchange rates
The exchange rate is the price of the Australian dollar in terms of another currency. Australia uses a floating exchange rate, so the dollar is set by demand for and supply of the currency in the foreign exchange market. Demand for the dollar rises with exports, foreign investment inflows and higher domestic interest rates.
- A depreciation (the dollar falls) makes exports cheaper and more competitive and imports dearer, helping exporters but adding to imported inflation.
- An appreciation (the dollar rises) makes imports cheaper and exports less competitive.
Step 1: Note the exchange-rate change
The Australian dollar falls from 70 to 65 US cents: a depreciation.
Step 2: Effect on export prices
Australian goods now cost foreign buyers fewer of their own currency units, so iron ore, education and tourism become cheaper abroad and export volumes tend to rise.
Step 3: Effect on import prices
Imports priced in foreign currency now cost more Australian dollars, so cars, fuel and electronics become dearer, which can add to imported inflation.
Step 4: Net effect on the economy
Cheaper exports and dearer imports tend to improve net exports , lifting aggregate demand and supporting growth and employment, though the inflation cost must be watched.
Globalisation
Globalisation is the growing integration of economies through trade, investment, technology, finance and the movement of people. For Australia it has brought lower prices, access to capital, new technology and larger markets, while increasing exposure to global downturns, commodity price swings and competition for local industries.
Students sometimes assume a stronger dollar always helps the economy. A higher dollar makes imports cheaper but hurts export and import-competing industries. Likewise a depreciation is not simply good or bad; always identify who gains (exporters) and who loses (importers and consumers of imports).
A strong response links comparative advantage to the gains from trade, evaluates protection on efficiency and equity grounds, and traces how exchange-rate moves flow through to trade, growth and inflation.
Exam-style questions
Questions in the style of TASC exam questions on this dot point, each with a worked answer. They are written by ExamExplained unless tagged "Past paper"; the year shows the paper a question is modelled on.
Practice6 marksWhat is meant by globalisation? Identify two (2) aspects of globalisation and briefly assess their contribution to free trade.Show worked answer →
Globalisation is the increasing integration of national economies into one global economy through the growing flows of goods and services, capital, labour, technology and finance across borders.
Two aspects, each assessed for its contribution to free trade (about 3 marks each):
- Trade liberalisation and regional/multilateral agreements (for example the WTO and free trade agreements such as the Australia-UK FTA). These reduce tariffs and quotas, directly expanding free trade and market access for Australian exporters.
- Advances in transport and communications technology (containerised shipping, the internet, global supply chains). These cut the cost and time of moving goods, services and information, making cross-border trade cheaper and easier and so supporting free trade.
Other valid aspects include the growth of transnational corporations and freer capital flows. A good answer links each aspect to how it lowers barriers and raises the volume of trade.
Practice10 marksEvaluate the possible costs and benefits to Australian individuals and businesses of globalisation.Show worked answer →
Define globalisation, then weigh benefits against costs for individuals and businesses, reaching a judgement (a 10-mark evaluate question).
Benefits:
- Individuals enjoy a wider range of cheaper imported goods, lower prices from competition, and more job and travel opportunities.
- Businesses gain access to larger export markets, cheaper imported inputs, foreign investment and new technology, raising efficiency and growth.
Costs:
- Individuals in import-competing or low-skill industries can lose jobs as production shifts offshore; income inequality may widen and conditions face downward pressure.
- Businesses face stronger import competition, and the economy becomes more exposed to global shocks (for example a downturn in a major trading partner).
Evaluation. For Australia, globalisation has on balance been beneficial - it has lifted living standards, expanded commodity and education exports and lowered prices - but the gains and losses are unevenly distributed, so government support such as retraining and adjustment assistance is needed to manage the costs.