2. Use the circular flow of income theory explain how Australia’s participation in international trade affects economic growth.
In the circular flow of income model, economic activity is depicted as a flow of goods, services, and money among households, firms, and the government. When Australia participates in international trade, it impacts various components of the circular flow of income, ultimately influencing economic growth.
1. Exports: When Australian firms export goods and services to other countries, it leads to an inflow of money into the economy. This increases the income of firms and their employees, leading to higher disposable income for households. As a result, households are able to spend more on goods and services produced domestically, stimulating economic activity and growth.
2. Imports: On the other hand, when Australia imports goods and services from other countries, it leads to an outflow of money from the economy. While this may reduce the income of domestic firms producing similar goods, it also provides access to cheaper imports, which allows households to save money or spend on a wider range of goods and services. This can lead to increased consumption and a higher standard of living, contributing to economic growth.
3. Investment: International trade can also attract foreign investment into Australia, which can boost economic growth by providing capital for businesses to expand and create jobs. This can lead to higher levels of production, income, and consumption, further fueling economic growth.
Overall, Australia's participation in international trade affects various components of the circular flow of income, leading to increased economic activity, higher levels of consumption and investment, and ultimately contributing to economic growth.