The Global Economy HSC

Global economy

All the countries that produce goods and services.

Economic integration

Occurs when trade barriers are reduced or removed between countries to facilitate free flow of goods and services and investment.

Gross world product (GWP)

The value of all the goods and services produced around the world over a period of time.

GDP

The total value of all the goods and services that an economy makes during a year.

Purchasing Power Parity (PPP)

An economic theory that uses a basket of goods to compare the value of currencies.

Global economic growth

Steady at 3.2% in 2024 & 2025.

Globalisation

Trade in goods and services, Financial flows, Investment and transnational corporations, Technology, transport and communication

International division of labour, migration

Trade in goods and services

Globalisation has led to growth in the exchange of products between economies.

Foreign direct investment

Investor establishes a new company abroad or buys 10% of shares in an existing company, often playing a management role.

Transnational corporations (TNCs)

Companies that operate in at least two countries and bring technology, education and investment.

Offshoring

When a firm moves part of the production process to a country with lower labour costs.

International Business cycle

The fluctuations in global economic growth, measured via GWP.

Factors strengthening the international business cycle

Trade flows, investment flows, Transnational corporations, financial flows, Global interest rates, commodity prices, international organisations

Investment flows

Economic conditions in one country will affect whether businesses will invest in new operations in other countries.

GFC

Global Financial Crisis, where 25% of decline in the US was transmitted to other economies.

Technological advancements

Huge advancements in technology have driven increased trade, including better transport technology and standardized shipping containers.

Migration

The movement of workers to advanced economies where job prospects are better.

Economic conditions

Factors that influence business investments and economic growth across countries.

Mergers and acquisitions

The growth in mergers and acquisitions leading to the rise of super companies worth billions.

Labour market

More internationalized, allowing workers to access better job opportunities in other countries.

Global interest rates

Inflationary pressures in 2022 saw banks raising interest rates, the RBA followed suit with interest rates rises in 2022 and 2023.

Economic growth and interest rates

If higher economic growth makes it necessary for central banks to increase interest rates in the United States, this places pressure on central banks around the world to do the same.

Commodity prices

In 2022, global sanctions against Russia, the world's 2nd largest supplier of oil, resulted in the largest global energy price increases in half a century, following contractions to worldwide supply.

Key commodities

The prices of key commodities such as energy, minerals and agricultural products are set by global markets.

Impact of commodity prices

Their prices in turn influence the levels of inflation, investment, employment, growth and other features of the international business cycle.

Oil prices and international growth

Historically changes in oil prices have had major impacts on international growth (with lower prices boosting overall growth).

G7

A forum connecting Italy, Germany, France, Japan, Canada, the US and the UK

G20 and G7 discussions

Discussions of global economic conditions at (G20) or (G7) can act as the unofficial forum for coordinating global macroeconomic policy.

Factors that weaken the international business cycle

Domestic interest rates, government fiscal policies, exchange rates, structural factors, regional factors

Domestic interest rates

Interest rates differ between countries and will have different impacts.

Impact of higher interest rates

Higher interest rates will dampen economic activity while lower interest rates will stimulate economic activity.

Government Fiscal policy

The UK's decision to leave the EU in 2016 reduced the rate of economic growth as investors' confidence in Britain's economy fell.

Fiscal policy effects

Fiscal policy has a significant effect on the growth rate in the short to medium term.

Exchange rates

Differ between countries and impact the level of trade competitiveness and confidence within economies.

Regional business cycles

fluctuations in the level of economic activity in a geographical region of the global economy over time

USMCA

The Canada-United States-Mexico Agreement that supports mutually beneficial trade and came into effect in 2020.

Opportunity cost

What you miss out on when you engage in economic activity.

European Union

A monetary union of European countries to reduce trade barriers and increase cooperation among its members.

World Trade Organisation

an organisation that aims to promote international free trade

Allocative efficiency

When resources are allocated in a way that reflects demand and makes the best use of them.

Structural change

Change in the size and composition of industries within the economy.

Disadvantages of free trade

Includes increased unemployment, environmental irresponsibility, and national security concerns.

World Trade Organisation's Doha Round

A development round that began in 2001 with the goal of reducing global protection, focusing on poorer nations.

International Monetary Fund (IMF)

An organization that ensures global financial stability and avoids global recessions and currency crises.

Global Financial Crisis (GFC) 2012

An economic event that the IMF responded to by pumping out US $520 billion.

Extreme poverty

Defined as living on less than US $1.90 per day.

Asian Financial Crisis

A financial crisis that faced criticism for making the situation worse due to IMF policies.

Consumer choice

Improves as consumers can buy goods and services they haven't been able to buy in the past.

Living standards

Improved through access to a range of cheap foreign goods and services.

Financial flows

The movement of money for investment, trade, or other economic activities across borders.

Foreign investment

Investment made by a company or individual in one country in business interests in another country.

Structural adjustment policies

Policies that the IMF requires economies to agree to in order to receive financial assistance.

Tariffs

Taxes imposed on imported goods, which can shrink economies like Canada's due to US policies.

Integration of economies

The process of economies becoming more interconnected, leading to stronger regional business cycles.

High-income Sub-Saharan African Nations

Countries that Chad, Uganda, and Sierra Leone depend on for more than 80% of their exports.

Bank for International Settlements (BIS)

Noted that exchange rates are having an increased impact on domestic economies, particularly in the last decade as government policy has less ability to target economic shocks.

Structural factors

Factors such as resilience in financial systems, innovation and takeup of new technologies, attitudes towards consumption and savings, population growth rates and age distribution, and methods of regulating the labour market.

Regional business cycles

The fluctuations in the level of economic activity in a geographical region of the global economy over time.

Economic costs of tariffs

USA's tariffs have resulted in around $30 billion per year in economic costs to the Canadian economy.

Canada - United States - Mexico Agreement (USMCA)

Came into effect in 2020 and supports mutually benefited trade.

GDP growth (2009-2019)

America's GDP grew by 27%, while Canada's expanded by 25%.

Impact of the Ukraine war (2022)

Reduced growth, trade, and economic policy across Europe and Central Asia.

East Asia's economic influence

Dominated by the influences of China and Japan, the world's 2nd and 3rd largest economies.

Sub-Saharan Africa's export dependency

Chad, Uganda, and Sierra Leone are dependent on high-income nations for more than 80% of their exports.

World's poorest region

⅓ of the population lives on less than $1.90 per day.

Economies of scale

When a good gets cheaper to make as a firm produces more of it.

Free trade

No artificial barriers to trade imposed by governments for the purpose of shielding domestic producers from foreign consumers.

Comparative Advantage

Countries should produce the goods where they have the lowest opportunity cost.

Specialisation

When countries only make the stuff they're really good at making.

World Trade Organisation (WTO)

Aims to encourage international trade by getting rid of barriers, enforcing transparency, and encouraging the exchange of goods and services.

Advantages of free trade

A range of cheap foreign goods become available, driving down prices and improving consumer choice and living standards.

World Trade Organisation's role

Facilitates international trade flows and resolves disputes by facilitating discussion or providing a decision.

Global Financial Crisis (GFC) response

IMF pumped out US $520 billion in response to the GFC.

World Bank's mission

Boosting development of poorer economies by providing loans, soft loans, and debt relief packages.

Extreme poverty reduction goal

Reducing the rate of extreme poverty to less than 3% of the world population by 2030.

Inequality reduction goal

Reducing overall inequality by stimulating income growth for the bottom 40% of global income earners.

Most-favoured Nation policy

A trade policy that requires countries to extend the same concessions to all members of the WTO.

Asian financial Crisis

A period of financial crisis that gripped much of East Asia beginning in July 1997.

Economic costs

The total cost of production, including both explicit and implicit costs.

Financial turmoil

A situation in which financial markets experience extreme volatility and uncertainty.

Integration

The process of combining different economies or markets to enhance trade and economic cooperation.

High-income economies

Countries with a high gross national income per capita.

Sub-Saharan Africa

The region of Africa located south of the Sahara Desert, often characterized by lower economic development.

Consumer wants

The desires of consumers for goods and services that can satisfy their needs.

Doha round

Started in 2002, it aimed to reduce protection for agricultural products to assist developing countries.

WTO appeal body

Since 2019, both the Trump and Biden Administration have refused to approve any replacement on the WTO's appeal body.

WTO enforcement powers

The US government has been critical of the WTO's use of its enforcement powers, accusing the WTO of failing to stand up to China's breach of trade rules.

The United Nations

Contributes to a more globalised world.

Sustainable development goals

Outline 17 ambitious goals in the areas of sustainable and clean energy, climate change, education, trade and poverty to be achieved by 2030.

The Organisation for Economic Cooperation and Development (OECD)

Conducts research into different economies and economic issues.

OECD Members

36 Members, mostly developed economies.

OECD Official Aims

Promote growth, employment, fiscal stability and high standards of living.

World Trade Organisation

Encouraging international trade and ensuring financial stability.

International Monetary Fund

Provides financial stability and assistance to countries.

World Bank

Development of poorer countries.

G7

A forum connecting Italy, Germany, France, Japan, Canada, the US and the UK.

G20

Created in 1999 in response to a number of financial crises during the decade.

G20 First Meeting

Met for the first time in 2008 during the GFC.

G20 Membership

Includes the US, Canada, Germany, France, Japan, Italy, UK, India, Russia, China, Australia, Brazil.