1. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser PART 6: AUSTRALIA IN THE INTERNATIONAL ECONOMY Chapter 12: Australia’s international trade Services Good s FDI A$

2. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-2 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-3 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-4 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-5 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-6 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-7 Trade Under Constant Opportunity Costs Opportunity cost Australia United Kingdom 1 kg cheese=0.80 m cloth1.5 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-8 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-9 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-10 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-11 Australia’s Rankings and % Share of World Trade 1980, 2003 Indicators World Ranking% share of world in 2003 1980 2003 Merchandise exports 18260.9 Merchandise imports 19 1.1 Services Exports 23251.2 Services Imports 14211.2 Source: Adapted from WTO, International Trade Statistics, 1990 and 2004.

12. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-12 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-13 Composition of Australia’s Merchandise Imports, A$ Bill, % Product categoryAverage 2000–01 to 2002–03, A$ billion 3-year average % share of total imports Total Primary products 17.814.4 Total manufactures STMs ETMs 103.2 11.4 91.7 83.4 9.2 74.1 Other 2.7 2.2 Total, Merchandise Imports 123.7100.0 Source: Compiled from Australian Bureau of Statistics, cat. no. 5302.0.

14. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-14 Geographic Distribution of Australia’s Merchandise Exports, 1969 to 19 72, 1995 to 1997, 2000 to 2002, % Source: Adapted from the Australian Bureau of Statistics data.

15. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-15 Australia’s major merchandise trade partners, % of total, 2002 Export markets(%)Import sources(%) Japan18.6United States18.1 United States 9.7Japan12.4 Republic Of Korea 8.3China10.1 China7.0Germany5.7 New Zealand6.6United Kingdom4.6 United Kingdom4.7New Zealand3.8 Singapore4.1Republic of Korea3.7 Taiwan4.0Singapore3.4 Hong Kong3.0Indonesia3.3 Indonesia2.6Italy3.0 Source: Adapted from the Australian Bureau of Statistics data.

16. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-16 Australia’s services trade, US$ billion, 1992 to 2002 Exports Imports Source: Adapted from World Trade Organization, 2002 International Trade Statistics.

17. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-17 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. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-18 Import Protection The nominal rate of assistance (NRA) The effective rate of assistance (ERA) (cont.)

19. Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 12-19 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