Free Trade and Protection

Arguments for free trade/ against protection

Increased production Production efficiencies Benefits to consumers Foreign exchange gains Employment Economic growth

Arguments for protection/ against free trade

Protect infant industries Protect against dumping of imports Protect domestic employment Defense argument Terms of trade argument Diversification Protect against cheap foreign labour

Absolute advantage

• Absolute advantage: when an economy produces more of a product than another country does by using its resources more efficiently

Examples of FTA's in Australia

• Australia-China 2015 • ASEAN (Australian-New Zealand) 2009 • Australia-Chile 2009 • Thailand-Australia 2005

Types of trade agreements

• Bilateral agreements→ between two countries such as the US-Australia FTA • Regional→ between many countries in a region such as APEC, NAFTA and ASEAN • Multilateral→ between many countries not necessarily in the same geographical region such as WTO

Sources of comparative advantage

• Comparative advantage is determined by a nations resources- human, natural and capital and its technological progress. It is also determined by the quantity and quality of a countries labour and capital resources.

Comparative advantage

• Comparative advantage: when a country has a lower opportunity cost than another when producing a good. It is determined by a nations quantity and quality of resources/ factor endowment.

Explain why nations trade

• Comparative and absolute advantage→ countries can consume outside their PPF • Supply and demand analysis→ the loss of consumer surplus is smaller than the gain in producer surplus when exports occur and so the net welfare increases and vice versa for imports. • Specialization (a method of production that focuses on a limited scope of products or services in order to gain a greater degree of productive efficiency) has enabled countries to become more productive

Free trade definition

• Free trade: the unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas.

protection definition

• Protection: Government action aimed at giving a domestic industry some artificial advantage over a competing foreign industry.

Different types of protection

• Quotas: direct restrictions on the quantity of imported goods • Tariffs: a tax placed on an import, this increases the domestic price of a foreign product. • Subsidies: grants or payments made by the government to domestic producers, this provides domestic producers with a cost advantage.