1. Chapter 8 – Free Trade 8.1 What is Trade?
8.2 Specialisation and Absolute Advantage
8.3 Comparative Advantage
8.4 International Trade
8.5 Winners and losers from trade
8.6 Protectionism
8.7 Free Trade vs. Protectionism
8.8 Free Trade Agreements
8.9 The Size and Patterns of Australia’s Trade
8.10 Globalisation

2. What is Trade?
Trade is the exchange of goods, services and currency in a market.
Individuals, firms and countries trade goods and services in order to exchange something they have to get something different in return.
Free trade refers to trade that is unregulated by the government and free of restrictions and taxes.

3. Specialisation and Absolute Advantage
Specialisation is when a producer only produces the goods that they are best at producing.
Absolute advantage is a situation where one party can produce a good or service at a lower cost or more efficiently than the other.
If each producer produces the good in which they are best at producing (have an absolute advantage), total production in the economy (or internationally) will be maximised, creating an efficient outcome.
China enjoys an absolute advantage in cheap, abundant labour.

4. Comparative Advantage
Comparative advantage is when a firm (or person or country) can produce a good at a lower opportunity cost than another firm.
A firm may not have absolute advantage in producing any good, but it will still have a comparative advantage in producing some good.
Total production increases when each firm specialises in producing the good(s) in which they have the comparative advantage.
Through trade both firms can be better off.
See explanation pg. 286
Ricardo cited wine as an example of comparative advantage.

5. International Trade Trade between countries will occur when:
One country does not possess a resource or good that another country has and there is demand for it.
Both countries have the resources to produce a good, but one country has an absolute advantage in producing the good.
One country has a comparative advantage in producing a good.

6. Winners and Losers from Trade
Exporters will gain from increased trade
Domestic producers of import competing goods will lose
Consumers will benefit
Trade will benefit the economy as a whole as total surplus will increase.
Overall the economy will be better off. Domestic import competing firms may have to change production to a good where they have a comparative advantage. This will lead to efficiency in the long run.

7. Protectionism
Protectionism is when governments enforce restrictions on trade to protect local industries from foreign competition. Types of protectionism:
Tariffs
Taxes on imported goods
Embargoes
A total ban on imports of a product of from a nation
Quotas
A unit restriction on imports of a certain good
Subsidies
A cash payment to a local producer by a government

8. Free Trade vs. Protectionism: The arguments for free trade
Increased competition:
Promotes efficiency through increased competition.
Producers forced to produce the goods in which they are most efficient on a world scale.
Inefficient industries will struggle to survive as they are undercut in price by more efficient overseas firms.

9. Free Trade vs. Protectionism: The arguments for free trade
Specialisation and comparative advantage
By specialising in producing goods in which they have a comparative advantage and importing goods they produce less efficiently, countries can increase total production.

10. Free Trade vs. Protectionism The arguments for protection
Infant industry argument
Industries that are just starting out need protection from foreign competition.
Governments cannot protect every firm, may resort to “picking winners”, such as in South Korea.
Can help in a developmental context.
May put money into an inefficient source of production.

11. Free Trade vs. Protectionism The arguments for protection
Jobs Argument
Free trade will lower the prices of domestic firms to compete with foreign firms, which will lower profits and cause job losses.
In reality free trade should just cause a movement of workers from inefficient import competing industries to efficient export industries.

12. Free Trade vs. Protectionism The arguments for protection
National Security Argument
Goods must be produced locally in the interests of national security. (i.e. steel to make tanks and guns)
Only legitimate if there are actual concerns over national security.

13. Free Trade vs. Protectionism The arguments for protection
Fair Competition Argument
Trade must be free on both sides in the interests of fair competition (otherwise the protected side gets all the benefits).
Possibly the only valid argument for protection.
As there are incentives for both sides to renege on free trade, countries enter into binding free-trade agreements.

14. Free Trade Agreements
Due to the fair competition argument countries sign free trade agreements to keep trade free of protection.
Australia has free trade agreements with ASEAN, Chile, the United States and New Zealand.

15. Protectionism in Australia
Since the 1980s Australia has slowly been removing its restrictions to free trade as part of its microeconomic reform and deregulation policy to increase efficiency and productivity in the economy.

16. The Size and Patterns of Australia’s Trade
Australia was the 20th largest trading nation in Australia’s biggest export sector is minerals and fuels, driven by demand from China. Australia has a comparative advantage in providing fuel and minerals.

17. Globalisation
Globalisation is the greater movement of people, goods, capital and ideas around the world due to increased economic integration.
The world economy now transcends national boundaries so that the scope for governments to influence domestic economic outcomes has diminished.

18. Benefits of Globalisation
Greater opportunities for growth.
Lower prices for consumers, greater choice of goods.
More export markets for domestic manufacturers.
Creates economies of scale through specialisation.
Greater competition.

19. Costs of Globalisation
Increases opportunities for wealthier nations to take advantage of poorer ones.
Contributes to increased pollution and environmental degradation because firms can outsource production to where environmental standards are less strict.
Keeps developing countries producing primary products which offer little scope for economic growth.
Cultural erosion may take place as traditional goods and services are replaced.
A diamond mine in Sierra Leone