Economics & Business · Year 12 · Australia and the Global Economy · Term 4

Arguments for and Against Free Trade

Evaluates the economic arguments supporting free trade and the various justifications for protectionist policies.

• ACARA Content Descriptions
• AC9EC12K10
• AC9EC12S05

About This Topic

The Balance of Payments (BOP) is a record of all financial transactions between Australia and the rest of the world. For Year 12 students, the focus is on the relationship between the Current Account (recording trade in goods and services) and the Capital and Financial Account (recording investment flows). We explore why Australia has historically run a Current Account Deficit (CAD) and how this is linked to our 'savings-investment gap', the fact that we invest more than we save domestically.

Students also analyze the 'Terms of Trade' (the ratio of export prices to import prices) and how fluctuations in commodity prices impact our national income. This topic is essential for understanding Australia's place in the global financial system. This topic comes alive when students can physically model the patterns of capital flows by 'investing' their class points in different 'international projects' and tracking the resulting credits and debits.

Key Questions

1. Analyze the economic benefits of free trade for consumers and producers.
2. Evaluate the validity of arguments for protectionism, such as infant industries or national security.
3. Compare the long-term impacts of free trade versus protectionism on economic growth.

Learning Objectives

• Analyze the economic arguments for free trade, identifying benefits for consumers and producers.
• Evaluate the validity of protectionist arguments, such as infant industries and national security.
• Compare the predicted long-term economic growth impacts of free trade versus protectionism for Australia.
• Explain how tariffs and subsidies function as tools of protectionism.
• Critique the distribution of gains and losses from free trade agreements.

Before You Start

Supply and Demand

Why: Understanding how prices are determined and how shifts in supply and demand affect market outcomes is fundamental to analyzing the impact of trade policies.

Market Structures

Why: Knowledge of different market structures, such as perfect competition and monopoly, helps students understand how trade policies can affect competition and producer behavior.

Government Intervention in Markets

Why: Students need to understand basic forms of government intervention like taxes and subsidies to grasp how protectionist policies are implemented.

Key Vocabulary

Free Trade	An international trade policy where governments do not restrict imports or exports, allowing goods and services to flow across borders with minimal barriers.
Protectionism	An economic policy of restraining trade between countries through methods such as tariffs on imported goods, quotas, and other government regulations.
Tariff	A tax imposed on imported goods and services, designed to make them more expensive and less competitive with domestic products.
Quota	A government-imposed trade restriction that limits the number or monetary value of goods that can be imported or exported during a particular period.
Infant Industry Argument	The economic argument that new domestic industries need temporary protection from international competition until they are mature enough to compete.

Watch Out for These Misconceptions

Common Misconception

A Current Account Deficit is always a sign of economic weakness.

What to Teach Instead

In Australia, a CAD often reflects high levels of foreign investment into productive sectors like mining. If the investment generates enough income to pay back the debt, it is considered sustainable. Peer teaching about 'productive debt' vs 'consumption debt' helps clarify this.

Common Misconception

The Balance of Payments doesn't have to balance.

What to Teach Instead

By definition, the sum of the Current Account and the Capital/Financial Account must be zero (plus errors and omissions). Using a 'double-entry bookkeeping' analogy helps students see that every purchase from overseas must be funded by either an export or a flow of capital.

Active Learning Ideas

Inquiry Circle: The BOP Ledger

Give students a list of 10 transactions (e.g., an Australian tourist buys a gelato in Rome, a Chinese firm buys an iron ore mine in WA). In groups, they must decide if each is a Credit or Debit and whether it belongs in the Current or Capital account.

30 min·Small Groups

Simulation Game: Terms of Trade Rollercoaster

Students act as the Australian economy. The teacher 'announces' changes in global prices for iron ore and iPhones. Students must calculate their new 'Terms of Trade' index and predict whether the AUD will likely rise or fall as a result.

35 min·Whole Class

Think-Pair-Share: Is Debt Dangerous?

Students read a short article about Australia's foreign debt. They reflect on whether it is a problem for future generations or a sign of a healthy, attractive economy, then debate their stance with a partner.

20 min·Pairs

Real-World Connections

• Australian farmers producing sugar or dairy often face global price volatility and lobby for government assistance or tariffs to protect their incomes from cheaper imports.
• The Australian automotive industry historically received significant protectionist measures before its eventual closure, prompting debates about the long-term economic viability of such support.
• Trade negotiators from the Department of Foreign Affairs and Trade regularly engage in complex discussions to establish free trade agreements like the one with the European Union, balancing export opportunities with domestic industry concerns.

Assessment Ideas

Discussion Prompt

Pose the question: 'If Australia were to completely eliminate all tariffs tomorrow, which domestic industries would likely benefit the most, and which would suffer the most?' Facilitate a class debate, asking students to cite specific economic reasons for their claims.

Quick Check

Provide students with short case studies of two hypothetical countries, one pursuing free trade and the other protectionism for a specific sector. Ask them to write 2-3 sentences explaining the potential short-term and long-term consequences for consumers and producers in each country.

Exit Ticket

On an index card, have students write down one argument for free trade and one argument for protectionism. Then, ask them to identify which argument they find more persuasive for the Australian economy today and briefly explain why.

Frequently Asked Questions

What are the 'Terms of Trade'?

It is an index that measures the relative prices of our exports compared to our imports. If the price of iron ore goes up and the price of TVs stays the same, our Terms of Trade 'improve', meaning we can buy more imports for the same amount of exports.

How does a CAD relate to the exchange rate?

Under a floating exchange rate, the CAD and the Capital Account surplus are two sides of the same coin. If we want to buy more imports (CAD), we must attract more foreign investment (Capital Account surplus) to pay for them, which affects the demand for AUD.

How can active learning help students understand the BOP?

The BOP is often seen as the most 'boring' part of the curriculum because it's just accounting. Active learning turns this into a puzzle. By categorizing real-world transactions, students stop seeing it as a list of numbers and start seeing it as a story of how Australia interacts with the world.

What is 'Net Foreign Debt'?

It is the total amount Australians owe to the rest of the world, minus what the rest of the world owes us. It is different from 'Net Foreign Liabilities', which also includes foreign ownership of Australian assets (like shares and land).