Unit 1
Unit 2
Trade and Aid
Every day, billions of dollars worth of goods and services are bought and sold. Many of these will be bought by people who live in a place which is quite remote from the place in which the product was made. For these products to change hands, they must be transported from one country to another. In other words, we need to trade. In simple terms, the word trade means “exchange”. International trade, on the other hand, is when we make an exchange that crosses national borders. For example, when a clothing retailer imports products from a manufacturer in China, they have engaged in international trade. Similarly, when an individual purchases a book over the internet from Amazon.com, that is also a form of import.
With all of the pressure to “buy Australian” in recent years, you could be forgiven for thinking that international trade harms our economy. It doesn’t. In fact, we are dependent on our ability to trade to maintain our standard of living. There are several reasons why countries choose to engage in trade:
- Differences in Resources: In a world without trade, only those countries with access to crude oil would be able to drive cars. Of course, that is assuming that they have access to the iron ore (necessary to make steel), rubber (for the wheels) and other products necessary to make the car, not to mention the expertise necessary to refine the crude oil into a useable fuel for the car.
Each country has access to different resources. In Australia it is easy to lose sight of this fact, because our country is rich in resources. But would it be fair to say to people in Switzerland that they can’t eat fish, simply because their country is landlocked? The people of Japan don’t have enough room to maintain farms to produce grain for their entire population. And here in Australia, we rely on trade for the same reason.
- Specialisation: There are some things that we do well in Australia, and there are other things at which we are not quite as efficient. For example, large areas of land mean that we are very good at producing crops. Similarly, high education standards mean that we are excellent at providing high quality services, such as education, legal and accounting services.
On the other hand, Australian wages are very high by world standards. This means that we are not as good at producing products which are very labour intensive. In general, this means that we are not a good source of manufactured items. Clothing, electronic goods and so on are all able to be produced at a lower cost overseas. Allowing the possibility of imports means that we can focus on the things that we do well.
- Economies of Scale: If we accept that it is good for countries to specialise (as detailed above), then it is more likely that we are able to achieve economies of scale. This simply means that the more we produce of something, the less we will pay per item. In Accounting terms this can be explained by saying that the fixed costs (such as rent) are spread across a broader product base. In Economic terms, we just need to recognise that when we make more of something the final cost to consumers will be lower.
- International Relationships: We should also recognise that trading allows us to build up relationships with other countries. In World War Two Japan was our most feared enemy; today the Japanese economy is one of our largest trading partners, and the people of Japan are universally recognised as great friends of the Australian people. In part, this positive relationship has been able to develop because of our inter-dependence – we benefit from the access to cars and electronic goods, while the people of Japan depend on us for food and raw materials.
Current Page: Why Do Countries Trade?
|  |