Hand in Question 1 1. Why did the Australian government give protection to the Australian car industry after World War 2?

The Australian government gave protection to the car industry after World War 2 as the government thought that the car industry, an infant industry, was critical to the future needs of the Australian defence force. Protection could, for example, increase economies of scale to promote efficiency, decrease costs and allow the industry to become internationally competitive in building vehicle engines and producing motor vehicle parts after the war. Also, cars were symbolic of Australia’s ability to become a fully industrialised developed country as cars represented modernity and wealth. Furthermore, the Australian government thought that a successful car industry would allow the economy to develop skills that were crucial to the future of the Australian economy and in previous instances, the car industry has always managed to prosper. However, there has been no form of evidence to support that statement.

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 shutdown in 2017. What impact will the shutting down of Holden have on the economy?

Since Australia’s car industry has been heavily protected by tariffs and government subsidies, it has effectively given the domestic car industry an artificial advantage over foreign competitors such as Toyota. This has led to an inefficient and uncompetitive domestic car industry in the long term. Also, the cost of production of cars in Australia became too expensive due to the high wages as 60% of the cost of production is wages, hence leading to the decrease in total car sales of over 40% in 1958 to 15.2% in 2006, and eventually the shutdown in 2017.

The impact of the shutting down of Holden on the domestic economy will lead to increased production in the long term as it enables the specialisation of production of the commodities which Australia has a comparative advantage. This allows the economy to take advantage of efficiencies from economies of scale and increased output, while international trade increases the size of the firm’s market which leads to decreased average costs and increase in productivity. Furthermore, production efficiencies will occur as the efficiency of resource allocation will be improved, which leads to increased productivity and total domestic output of goods and services, and the increased competition will allow for innovative production methods, new technology and marketing and distribution methods. However, the shutting down of Holden will induce short-term structural unemployment as the workers will have to find new jobs by undergoing training and reskilling programs.

3. Why has the Australian government stopped giving protection to the car industry?

The Australian government has stopped giving protection to the car industry as the protected car industry, an infant industry, became inefficient as protection in Australia usually becomes permanent. Also the government realised that protection was counter-productive in terms of helping the industry become more efficient due to the misallocation of resources, short productions and absence of economies of scale. This resulted in a lack of incentive by domestic producers to innovate as they became reliant on protection. The government decreased protection by steadily decreasing tariffs on imported cars and providing subsidies to make the Australian car industry more internationally competitive and efficient.

4. Does Australia have a comparative advantage in the production of cars? Explain your answer.

Australia does not have a comparative advantage in the production of cars as the economy as a high opportunity cost in the production of cars compared to other countries. This is shown by what the economy gives up (i.e. large amounts of production in agriculture and mining industry in which we have a comparative advantage in) in order to produce cars (i.e. what it gains). However, in other countries such as Japan, the economy is much more efficient in the production of cars when compared to other goods and services. Hence, Australia does not have a comparative advantage in the production of cars.