Australia’s Comparative Advantage:
Are We Maximizing Trade Opportunities?
The objective of this assignment is to get you to undertake a modest piece of applied economic research. In this essay, you are asked to engage in research to identify Australia’s strengths and weaknesses as a trading economy and present these information in succinct, neat form. You are then asked to use your knowledge of trade theories to evaluate whether our current trading arrangements with major trading partners provide the optimal gains for the domestic economy.
In your essay, I want you to talk about an introduction to economics, macroeconomic concept and tools of analysis, Comparative Advantage & Trade Under Constant Costs, Trade Under Increasing Opportunity Costs, Sources of Comparative Advantage, etc.
A comprehensive analysis, involving all aspects of the economy, will be too much to demand for in an essay write-up that is limited to 2000 words only. It is thus suggested that while you provide a comprehensive view, it may be useful to focus your extensive and detailed discussion on the most significant elements of the topic at hand. Feel free to modify the title of the topic above, to reflect the more narrow focus of your essay.
The research essay should clearly demonstrate your competence in using the tools of economic analysis. The critical element of this essay is how the theories of trade are used (validated or otherwise) to evaluate Australia’s most pressing trading concerns and what this means for government, in particular and the economy, in general.
ECF9210 – Introduction to International Economics
Notes on Essay 1
This is a suggested essay structure only. Generally, I’ve found this to be the most logical way to answer a research question in an academic context. Feel free to use your own structure if you there’s one you’re more comfortable with. So here’s my great 100 percent full proof, invincible way of answering essay questions:
THEORY
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APPLICATION OF THEORY (TO THE RESEARCH QUESTION)
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CONCLUSION
Theory
In this part of the discussion, you might want to introduce, review and discuss the trade theories that you will later on use to analyse the research question, i.e. whether Australia is currently maximising trade opportunities.
Trade Theory to date: Up until now, we’ve basically covered the comparative advantage (CA) theory of trade. The CA theory is pretty straightforward. It states that every country is good at doing something. We call this a nation’s comparative advantage. What drives the comparative advantage? Well, later on, we’ll determine that it’s this thing we call factor endowments, i.e. our God given natural ability (I’m being a bit facetious here but you get the point).
So the CA theory of trade states that each country should stick to what they are good at, i.e. their comparative advantage. When countries focus production on what they’re good at, then they specialise in something. By specialising, we are able to produce more of one good than if we were to split our productive efforts across multiple areas. We then sell our specialised good in international markets (exports) and buy other stuff that we want or find useful (imports).
Remember the definition of an export is something that you produced but don’t intend to consume yourself. Conversely, the definition of an import is something that someone else produced but you consume it.
The best way to think about this is to imagine yourself as a country and everyone you trade with are other countries. Starting off with the theory of comparative advantage, we should look at our productive skills and ask ourselves, what are we good at? Let’s say for arguments sake, that we’re all really good at farming but really crap at doing everything else. What made us so suited to farming? Well assume that you own heaps of arable land that is well suited to farming. In other words, you are well endowed with factors of production that are suited to farming. In terms of productive efficiency, this means that you can produce farming goods at a low cost. Others may need to irrigate their land or use expensive fertiliser or transform their land in some way, which makes their cost of production high. We on the other hand are lucky enough to have good land and so our production costs are low.
Keeping this in mind, we should therefore focus our productive efforts on farming produce. We then take our produce to the village market where we sell our goods in exchange for money. We use that money to purchase other things we want or find useful, e.g. BMWs, TVs, computers, textiles, professional services, haircuts, etc… This model of specialised production is certainly more efficient than if we tried to make everything by ourselves. For instance, we’re crap at making BMWs. So if we tried to make a decent BMW, it would take up a lot of our resources (time, capital, training, etc…) and we wouldn’t have time for everything else and we’d end with substandard products and high costs of production.
To recap, in our example:
Comparative Advantage: Farming
Why? Because we are ‘well endowed’ with arable land which makes our cost of production low (compared with less endowed individuals)
Specialise in our comparative advantage, i.e. farming
Sell our goods (export) at the village market
Buy other people’s goods (import) at the village market
We have better consumption outcomes, i.e. more diversified goods at lower cost than if we tried to do everything ourselves
Alright, by now, using your keen sense of deduction, you’ve probably realised that the ‘person’ we’re talking about isn’t really a person. It’s a country! And that country is AUSTRALIA!! Making sense?
In terms of reviewing our trade theory, you might want to use something like the above example as a guide. Of course, make it more professional. Like, I don’t expect stories about Bob the farmer or anything. Use the analytical derivations from the textbook. That is, you should also include things like the Production Possibility Frontier (PPF) and show how specialisation expands the PPF through the expanded trading possibilities line, etc… I think there’s a numerical example in the textbook involving ‘Autos’ and ‘Cloth’ or ‘Wheat’ I can’t remember which. Feel free to reproduce something similar to that to show numerically how much better off we are under this comparative advantage model of production and trade.
Also where possible, I’d like to see evidence and good references. If we’re going to say that Australia has this comparative advantage in agricultural produce and mining produce, then we need to support this with a bit of evidence. Some good places to start might be RBA’s website. You might try and see if anyone has written a white paper or something on Australia’s comparative advantage. Try any of the Federal Government Departments as well, e.g. Department of Foreign Affairs and Trade (DFAT) or Department of Agriculture and Fisheries or something like that. You might also want to try the Federal Treasury. They would all have done research on this sort of thing. You can also look at industry groups or any commissioned research. I’m also happy to accept speeches by Ministers, officials or heads of research groups (like Allens consulting or Access Economics, etc… Not sure if they’ve done anything but try anyway).
The grey area might include things like newspaper articles and magazine articles. If you’re going to cite newspaper articles as evidence, they’d have to ‘credible’ sources, like the Australian or the Financial Review. The Age might be pushing it (especially with the tripe they’ve been serving up as news lately). Forget Herald Sun and MX! Mag articles. Again, depends on the ‘credibility’. I’m ok with the Economist. BRW is so-so. You get the point. Basically, unless there’s a really compelling reason why you’d like to quote a newspaper or mag article, then I’d try to avoid it overall. Don’t forget, this is still supposed to be an academic exercise and I have to grade accordingly.
Application of Theory
Now, I’m giving you guys a huge leg up and provided you with a publication from the Australian Bureau of Statistics (ABS). Alright, its not that much of a leg up but I’m trying my best without breaking any rules. For those who’ve never used the ABS before, they are the national statistical collection agency and they collect stats on all kinds of crap. One of them is trade patterns.
What good is this to us? Well, I’m glad you asked. If we’re going to say that Australia has got this comparative advantage in agricultural produce and mineral ores, or whatever it is we think Australia has a comparative advantage in, then we should be specialising in and exporting those goods and those exports should show up on our trade statistics. This publication has some of those trade stats, itemised by category and commodity.
Feel free to quote any of the stats here. In the first half, there’s generally three types: unadjusted data, seasonally adjusted and trend estimates. For the purposes of this discussion, it doesn’t really matter coz I think they all end up telling the same story anyway.
The second half contains trade stats itemised by commodity. It’s more detailed so you can drill down and use that if you have a burning desire to talk about something in particular.
What will really impress me is that if you take some of these stats and turn them into charts or bar graphs or whatever. If you want to show the time series, you can access the original data through ABS (it’s all free now ABS cat 5368.0) and this will show Australia’s trade pattern across time. I’m just trying to give you some ideas. But some of the best work I’ve seen usually involves some effort on the student’s part to go beyond quoting statistics and really presenting them as information in a meaningful way. You might also want to combine with other stats and present the trade as a proportion of GDP.
Some other suggestions in answering the research question might be to look at comparative trade stats across other countries. Canada’s economy is often regarded as being similar to Australia’s. Have a look at their trade stats and see if their trade patterns are similar to ours. If they trade a larger volume of their GDP (as a percentage) than Australia does, then is Australia really maximising trade opportunities? Isn’t there room for us to specialise and trade more?
You might also want to look at comparative stats across our trading partners and see what they’re getting up to. Get stats for US, China and Japan. What’s their pattern of trade? Can we explain it using our CA theory? Are there potentially untapped markets in any of these countries? Are we exporting too little/too much? Can we do better?
In terms of you analysis, this is where I’d expect to see the bulk of the work, i.e. application of the theory to real life trade patterns.
Conclusion
Are we maximising our trade opportunities? Can we do better? Are there untapped markets? Are we taking advantage of our trading partners’ growth (China)? What does the evidence say? What do you think?
Does the theory hold up to evidence? Do we really believe this comparative advantage thing happens in real life? Why/why not?
These are the sorts of questions you might want to think about when writing your conclusion. Overall, your conclusion should really be an answer to the research question and anything else you might think is interesting.
Don’t introduce anything new. This will confuse the reader. Every concept you need to introduce and discuss should be done in the earlier sections.
Take the view that if you were writing for a manager, what would they want to see at the end of the day? If I skipped everything in the middle and jumped straight to the conclusion, would I still capture all the ideas you presented in the body of your essay? This is often a good acid test to see if you have a well rounded and robust conclusion.
Ok then. I hope all that helps. Good luck with the essay guys.
Credit:ivythesis.typepad.com
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