Re: 2015 HSC Economics Marathon
Analyse the implications for firms and individuals in Australia of a reduction in protection levels (4 marks)
Individuals:
ADV:
-Due to the liberalization of trade, individuals can have access to a greater range of international products axtat lower prices, resulting in domestic demand being satisfied, as well as increasing economic efficiency. As a result from the greater mix of goods from both overseas and domestic sources, there is an increase in the quality and quantity of goods available to Australian consumers, resulting in the increase of general living standards.
DIS:
-However, as a result of free trade, there is an increase in short term structural unemployment. This is mainly due to the structural unemployment caused by the specialization of firms, resulting in inefficient industries, that can't compete with the international market, to be lost. Thus the government must provide welfare services in order to minimise job displacement.
Firms:
ADV:
-Free trade has allowed countries to specialize in the productions of goods in which they have a comparative advantage in. Ultimately this leads to an optimal allocation of resources and a greater allocative efficiency. For example, the Australian economy can gain outputs through economies of scale due to their ability to generate a larger output in mining commodities. Due to the increase in allocative efficiency and specialization, Australian businesses experience economies of scale through lower unit costs of production, thus resulting in higher levels of output and employment.
-Also firms have a greater incentive to innovate in production, through the use of latest cost reducing technology as a result of liberalization of trade. This in turn, enhances the efficiency of firms, resulting in the increase competitiveness between firms.
DIS:
-However, newly established firms find it difficult to compete against the more efficient and advanced international firms. It takes longer for the infant industries to achieve economies of scale, due to a lack of experience, ultimately resulting in infant industries failing due to their lack of ability to compete with the international firms.
-There is a lack of diversification of exports for countries, since domestic businesses will specialize in areas of production where they have a comparative advantage. Thus countries become more dependent on other countries.
-Free trade may also cause unfair price cutting, known as dumping, where their exports are sold below the factor costs in the foreign markets, resulting in new and infant industries in other countries to go out of business.
-Free trade has resulted in the increase of negative externalities, because of domestic businesses undertaking weaker environmental protection practices, in order to produce goods at a lower price. These externalities may be higher levels of pollution, the degradation of the environment, and the exploitation of labour.
