Globalisation and competitiveness: WACE Year 12 Economics Unit 3
“Explain globalisation, the terms of trade and international competitiveness, and analyse Australia's trade relationships and the role of productivity”
Globalisation is the growing integration of national economies through trade, finance, technology and labour. International competitiveness depends on relative costs, productivity and the exchange rate, while the terms of trade measure export prices against import prices. Australia is deeply integrated, with China as its dominant trading partner.
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What this dot point is asking
SCSA wants you to define globalisation and its dimensions, explain the terms of trade and what drives international competitiveness, and analyse Australia's trade relationships and the role of productivity. Expect a terms of trade graph as stimulus and an extended response.
What globalisation is
Globalisation is the increasing integration of national economies into a single global economy through the freer movement of goods and services, capital, technology, labour and ideas across borders.
The main dimensions are:
- Trade in goods and services, supported by lower transport costs and trade liberalisation.
- Financial flows, including foreign direct investment and portfolio capital.
- Technology transfer and the spread of global supply chains.
- Labour movement, including skilled migration.
Globalisation has been driven by trade liberalisation (through the WTO and free trade agreements), deregulation of capital markets, falling communication and transport costs, and the rise of multinational corporations.
The terms of trade
The terms of trade (TOT) measures the ratio of export prices to import prices:
A rise in the terms of trade means export prices are rising relative to import prices, so a given volume of exports buys more imports. This raises national income.
Australia's terms of trade are dominated by commodity prices. The China-driven mining boom pushed the terms of trade to a record high around 2011, lifting national income, wages and the AUD. They eased after 2011 but rose again strongly in 2021 to 2022 on high iron ore, coal and LNG prices, supporting federal budget revenue and a run of current account surpluses.
A higher terms of trade boosts real national income, the exchange rate, company profits and government tax revenue, but it can also crowd out trade-exposed manufacturing (the resource reallocation sometimes called Dutch disease).
Suppose Australia's export price index rises from 100 to 120 while its import price index rises from 100 to 105 over the same year. The terms of trade index is . The index has risen from 100 to about 114, an improvement of roughly 14 percent. This means each unit of exports now buys about 14 percent more imports than a year earlier, raising real national income even if the physical volume of exports has not changed. This is exactly the channel through which the 2021 to 2022 commodity price surge lifted Australian incomes and budget revenue.
International competitiveness
International competitiveness is the ability of Australian producers to sell goods and services in world markets at a profit. It depends on:
- Relative costs and prices, including wages and input costs.
- Productivity, the output produced per unit of input. Higher productivity lowers unit costs and is the most sustainable source of competitiveness.
- The exchange rate. A lower AUD improves price competitiveness; a higher AUD erodes it.
- Quality, innovation and reliability, especially for services and differentiated goods.
Real wages and living standards can only rise sustainably if productivity rises. Australia's productivity growth slowed in the 2010s and into the 2020s, a concern flagged by the Productivity Commission and the RBA. Lifting productivity through microeconomic reform, skills and investment is central to long-run competitiveness.
Australia's trade relationships
Australia's trade is heavily concentrated in Asia. According to ABS and DFAT data:
- China is Australia's largest two-way trading partner by a wide margin, taking a large share of iron ore, coal, LNG, education and tourism exports.
- Japan, South Korea, India and the United States are other major partners.
- Exports are dominated by resources and energy, with services (education and tourism) and agriculture also significant.
This concentration creates both opportunity and risk. The 2020 to 2021 trade tensions with China, which saw restrictions on barley, wine, coal and other goods, highlighted the danger of over-reliance on a single market and prompted some diversification.
Free trade agreements
Australia is party to numerous agreements that deepen integration:
- ChAFTA (China), JAEPA (Japan), KAFTA (Korea).
- CPTPP (a multilateral Pacific agreement).
- RCEP (a large regional Asia-Pacific agreement).
- Membership of the World Trade Organization (WTO), which sets multilateral trade rules.
Costs and benefits of globalisation
Benefits: access to larger markets and cheaper imports, technology transfer, foreign investment, greater competition and efficiency, and higher living standards.
Costs: structural adjustment and job losses in uncompetitive industries, greater exposure to global shocks (financial crises, pandemics, supply chain disruption), and concerns about inequality and environmental pressure.
The terms of trade is a price ratio, not a measure of how much Australia exports. A rising terms of trade means export prices are rising relative to import prices; it does not by itself mean export volumes have risen. Keep price effects and volume effects separate when analysing the impact on national income and the balance of payments.
Exam-style questions
Questions in the style of SCSA 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.
WACE 2023-style10 marksExplain the terms of trade and analyse the effects of a sustained rise in Australia's terms of trade on national income, the exchange rate and the structure of the economy.Show worked answer →
A 10 mark response needs the terms of trade defined, then the three effects analysed.
Definition. The terms of trade is the ratio of export prices to import prices, . A rise means a given volume of exports buys more imports.
National income. Higher export prices (driven by iron ore, coal and LNG) lift export revenue, company profits, wages in resource regions and government tax revenue, raising real national income even if export volumes are unchanged.
Exchange rate. Stronger commodity export earnings raise demand for the Australian dollar, appreciating it (the commodity-currency effect), which then dampens competitiveness for other exporters.
Structure. Resources are drawn into mining (capital, labour, the higher dollar), crowding out trade-exposed manufacturing and some services, the reallocation sometimes called Dutch disease.
Markers reward the price-ratio definition, the income gain shown as a price (not volume) effect, the exchange-rate channel, and the structural reallocation.
WACE 2022-style6 marksExplain why productivity is the most sustainable source of international competitiveness for Australia.Show worked answer →
A 6 mark response needs the drivers of competitiveness, then why productivity dominates in the long run.
Competitiveness depends on relative costs and prices, the exchange rate, and productivity. The exchange rate and relative wages can shift competitiveness in the short run, but they are volatile and partly outside policy control, and a lower dollar improves competitiveness only by lowering real incomes.
Productivity is output per unit of input. Raising it lowers unit costs without cutting real wages, so it improves competitiveness and living standards at the same time. It is the only driver that can lift both sustainably, which is why the Productivity Commission and RBA have flagged Australia's slowing productivity growth as a central concern.
Markers reward the contrast between short-run levers (exchange rate, wages) and the durable, income-raising nature of productivity gains.