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6.4 The benefits of international trade for Australia and the global economy
FIGURE 6.3 How Australia’s exports are divided among our top ten trading partners — nearly 80 per cent of our total exports are sold to only these ten countries.
Australia’s top ten trading partners ranked by the percentage of total exports
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Taiwan 2.7% Malaysia 2.2%
New Zealand Singapore 3.3% 3.6% India 3.9% China United Kingdom 35.3% 4.4%
United States 5.8%
Republic of Korea 5.8% Japan 11.8% Source: Data derived from Australian Government, Department of Foreign Affairs & Trade, Trade & Investment at a Glance, 2019–20, page 18. 6.2 Activities
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Track your results and progress Find all this and MORE in jacPLUS 6.2 Quick quiz 6.2 Exercise 6.2 Exercise 1. Define what is meant by international trade. (1 mark) 2. Outline two reasons why most countries trade internationally. (2 marks) 3. Distinguish exports from imports. (1 mark) 4. List the main types of goods and services that Australia (a) exports and (b) imports. (2 marks) Fully worked solutions and sample responses are available in your digital formats. UNCORRECTED PAGE PROOFS
KEY KNOWLEDGE
• the relevant measures and statistical indicators of the issue of the economics of international trade
Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. Australia records the value of its international trade transactions with the rest of the world on a financial account called the balance on goods and services (BOGS). Sometimes this is also called the balance of trade. The BOGS represents the difference between the total value of exports of goods and services minus the total value of imports of goods and services, measured over either 3 months or a one-year period. As illustrated in figure 6.4, it classifies transactions according to which way the money is moving: • When we export goods (e.g. minerals, wool) and services (e.g. education and tourism), the money we are paid is coming into Australia and hence is recorded as a credit transaction by Australia (and of course a debit by some overseas country). • When we import goods (e.g. minerals, wool) and services (e.g. education and tourism), the money for payment is going out and leaving Australia and is thus recorded as a debit transaction by Australia (and a credit by some overseas country).
FIGURE 6.4 The balance on goods and services (BOGS) Total credits (money received from overseas) for our exports of goods (e.g. wool, minerals) PLUS exports of services (e.g. tourism, financial)
BOGS = credits (+) minus debits (–) Total debits (money paid to overseas) for our imports of goods (e.g. oil, cars, clothing) PLUS imports of services (e.g. transportation, insurance, education) When we compare the total value of credits for exports of goods and services against the total value of all debits for imports for goods and services over a year, the balance on goods and services (BOGS) can be one of three possible outcomes: UNCORRECTED PAGE PROOFS • A trade surplus on goods and services (e.g. if the value of credits was $10 million and the value of debits was $6 million, then the trade surplus would be $4 million) • A trade deficit on goods and services (e.g. if the value of credits was $8 million and the value of debits was $14 million, then the trade deficit would be $6 million)
• A trade balance on goods and services (e.g. if the value of credits was $10 million and the value of debits was $10 million, then there would be an exact trade balance of $0 million).
As shown in figure 6.5, overall Australia has run a few more deficits than surpluses over this period, although recently there have been large trade surpluses. In these latter years, the trade balance has been stronger because the total value of exports of goods and services is greater than the total value of imports of goods and services.
FIGURE 6.5 Trends in Australia’s balance on goods and services (BOGS) Changes in the value of Australia’s export credits, import debits and the BOGS 60 000 50 000 40 000 30 000 Value ($ millions) –10 000 0 10 000 20 000 BOGS surpluses BOGS surpluses –20 000 –30 000 –40 000 –50 000 Feb-2010 J un -2010 Oc t-2010 Feb-2011 J un -2011 Oc t-2011 Feb-2012 J un -2012 Oc t-2012 Feb-2013 J un -2013 Oc t-2013 Feb-2014 J un -2014 Oc t-2014 Feb-2015 J un -2015 Oc t-2015 Feb-2016 un -2016 Oc t-2016 Feb-2017 J un -2017 Oc t-2017 Feb-2018 J un -2018 Oc t-2018 Feb-2019 J un -2019 Oc t-2019 Feb-2020 J un -2020 Oc t-2020 Feb-2021 J un -2021 Oc t-2021 Feb-2022 Month/year Balance on goods and services; Credits, Total goods and services; Debits, Total goods and services; Source: https://www.abs.gov.au/statistics/economy/international-trade/international-trade-goods-and-services-australia/latestrelease.
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6.3 Quick quiz 6.3 Exercise
6.3 Exercise 1. Describe what the balance on goods and services (BOGS or balance of trade) measures. (2 marks) 2. Examine table 6.1 and then answer the questions that follow. TABLE 6.1 The value of international transactions involving goods and services for a country
International transaction for a country Value of transaction ($ millions)
Exports of goods 20 Imports of goods 30 Exports of services 5 Imports of services 10
Use table 6.xxx to calculate each of the following: (3 marks) a. the balance of goods b. the balance of services c. the trade balance for goods and services. 3. Using table 6.2, indicate whether the item is most likely to be recorded as a credit or debit on Australia’s balance of trade: TABLE 6.2 Transactions recorded as part of Australia’s balance of trade
Item Most likely recorded as a credit for Australia
Most likely recorded as a debit for Australia Crude oil Laptops Shoes Iron ore Defence equipment Machinery (3 marks) UNCORRECTED PAGE PROOFS
6.4 The benefits of international trade for Australia and the global economy
KEY KNOWLEDGE
• the reasons the issue of the economics of international trade is of importance to the economy at a local, national, and international level
Source: VCE Economics Study Design (2023–2027) extracts © VCAA; reproduced by permission. Most economists believe that, overall, international trade is beneficial for the countries involved, especially over the longer-term. This helps to explain why the total value of world trade has grown by an average of over 5 per cent a year over the last 20 years, even with the global COVID-19 pandemic and disrupted supply chains slowing things down. Indeed, we can’t survive well without it. Some of these advantages are summarised in figure 6.6.
FIGURE 6.6 The encouragement and expansion of international trade can bring important benefits for nations. The potential benefits for countries that engage in international trade 1. Exports allow local firms to gain more economies of large-scale production 2. Exports help grow AD and increase GDP, employment and incomes 3. Exports expand Australia’s employment opportunities and average incomes 4. Imports increase our access to resources and help grow our potential GDP
5. By increasing competition, imports keep inflation lower, boost efficiency and increase our purchasing power At the macroeconomic level, there are many important reasons why international trade in goods and services is vital for the Australian economy and improvements in our living standards. Exports allow local firms to gain more economies of large-scale production For most businesses, it is more efficient and profitable for firms to manufacture and produce goods and services on a large-scale with bigger production runs, rather than having smaller-scale operations. This is because some costs are relatively fixed and don’t increase in direct proportion as a firm lifts its output. Here we might think of costs such as: • buying machinery, equipment, and technology • undertaking research, product design and development • advertising and marketing • the purchase of raw materials and other resources including borrowing bank credit that is cheaper for larger firms • management and the training of staff. UNCORRECTED PAGE PROOFS When producing in bulk for a bigger market, these relatively fixed costs can be spread more thinly over higher levels of output, so the average unit cost is far lower. Firms can gain more economies of large-scale production. For example, assume that the total cost of a new product’s design, equipment and so on was say $1 million and only one unit was sold. To cover the fixed cost, the single item would have to sell for at least $1 million to break even. However, if sales increased to one million units, to break even, each product could be sold for as little as $1!
