Comparative Advantage: The Basis For Trade

Hand In Questions
1. Why did the Australian government give protection to the Australian car
industry after World War 2?
Australia saw the potential of the emerging car industry so the government took
advantage and attempted to protect the industry through various protectionist policies,
such as subsidies and tariffs. At the time around 1940's to 1950's, motor vehicles had
just been new invention and a new form of transport, so public demand was high. Cars
have been symbolic of modern advancements and soon become a part of everyday
lifestyle. The government also saw the need to protect the industry as a way to boost
the Australian economy and provide the war participants with sustainable employment
opportunities.
2. Give reasons for the decline in Holden's share of car sales in Australia from
over 40% in 1958 to 15.2% of total sales in 2006 and finally the shut down in
2017. What impact will the shutting down of Holden have on the economy?
One of the main reasons for Holden's decline in share of car sales is the increase in
competitors, both local and international. Holden's contribution to over 40% of car sales
was mainly due to only one major competitor, Ford, which was established in 1925.
Another factor involved is that Holden was the first company to mass produce whole
cars using Australian parts. The demand for motor vehicles soared after World War II,
and Australia was one of the few advanced economies who had the technology to
produce cars. When Toyota Australia, a subsidiary of Toyota Motors based in Japan,
began operations in 1958, the sales of Holden declined slightly. As global economies
began removing their trade barriers (Australia became a member of the WTO in 1995)
in order to work efficiently, Australia followed by opening its market to foreigner, which
allowed major competitors from Germany and Japan to penetrate the Australian car
industry. As a result of the introduction of new car companies, consumers have a larger
range of choices and higher chance of purchasing cars beyond Holden's, accounting for
the decrease shares of sales.
The high Australian dollar, which reached parity with the US in October 2010, is also a
factor to consider. As a indirect result of the increasing Australian dollar, domestic
exports become more difficult to sell to foreigners. However, Australian consumers
would purchase more imported goods as the Australian dollar now have more value.
The company announced that it will shut down completely in 2017, due to low sales
and high cost of production. Holden's loss of $152.8 million in 2012 renders the
company unable to continue manufacturing cars and almost 3000 workers will lose
their jobs over four years. Australia work practices such a high minimum wage for
workers also contributed to the shutdown of the company.
Shutting down a domestic company will have adverse effects on the economy, as
consumers will be more likely to purchase imported goods, which are leakages of the
economy, thus contributing to the national debt. Job losses will cause increased welfare
payments and increased taxation from taxpayers, ultimately leading to larger wage
claims. Overall, the shutting down of Holden would slow the growth of the economy.
3. Why has the Australian government stopped giving protection to the car
industry?
Since the Whitlam government was in power, the overall trade protection has declined
and some even eliminated altogether. The purpose of removing protection is to allocate
resources more efficiently and encourage large firms to become more competitive.
Declining trends in the automobile industry indicates that funding is unsustainable and
the company will not operate indefinitely. The government believes that it should forgo

protecting a falling industry and rather focus on a market in which they have a
comparative advantage in.
4. Does Australia have a comparative advantage in production of cars? Explain
your answer
Comparative advantage means when a country can produce a certain good with less
opportunity costs. Although Australia has advanced technology in production of car, it
is not the most efficient production as Australia is a land of resources such as mines
and iron ores. Australia also possess a large population of skilled workers, capable of
manufacturing high-tech goods such as electronics. It has to forgo a large cost in order
to produce cars. Therefore, Australia has a high opportunity cost of producing cars and
hence does not have a comparative advantage.