eco topic 1 yr 12: the global economy

gross world product (GWP)

sum of total output of goods and services by all economies in the world over a period of time

Ways to calculate GWP:

1.     Convert every country’s GDP into a single currency using the exchange rate

2.     Purchasing Power Parity (PPP) – adjusts for differences in prices – better measure of actual spending for people in developing countries

GDP

value of all final g.a.s produced in an economy over a period of time

Globalisation

integration between different countries and economies,

leading to increased impact of international influence

on all aspects of life and economic activity

what is trade in g.a.s or trade flows a measure of

Measure of how g.a.s produced in an economy are consumed in other economies around the world

trade in g.a.s / trade flows: what has the value of exports of g.a.s grown from 1990 to 2024?

1990 - US$ 4.3 tril (19% of global output)

2024 - US$ 33 tril (29% of global output)

trade in g.a.s / trade flows: what % of Australia’s outputs are exported?

~24%

what does the long term trend of growth of services trade reflect and what % does services make up of global exports?

• reflects expanding role of finance, communication, tourism, education + digital services

• Services represent 27% global exports

reasons for increase in trade: comparative advantage

• As economies do not produce all the items they need or they do not produce them as efficiently as other economies

  • thus must trade with other countries

  • e.g Australia exports a lot of coal but must import manufactured goods

how has new tech in transport and comms contributed to increase in trade

• reduced the cost of moving goods between economies and providing services to customers in distant markets

  • e.g Standardised shipping containers cut the time taken to load cargo from days to just hours

how did governments contribute to increased trade?

• Governments encouraged trade

  • by removing barriers and joining trade groups such as WTO, EU and ASEAN

why have financial flows increased over the last ~50 years?

• international financial flows expanded significantly following financial deregulation (1970s-80s)

  • where controls on foreign currency markets, foreign capital flows and interest rates were lifted

main benefit of financial flows

• they enable countries to obtain funds they can use to finance domestic investment

• Countries with low national savings levels would not otherwise be able to obtain necessary finance to undertake large-scale business/investment projects (e.g Argentina)

what is the most liquid financial market and how much does it trade/day?

• Foreign exchange (FX)

• trades ~$US 9.6 trillion / day

what is portfolio investment

• buying / selling securities (debt/equity) that do not involve managerial control

• Channels capital across borders and domestic markets

what is bank and credit flows

overseas lending between financial institutions

what are remittances

money that migrant workers send to their home countries

what is FDI (foreign direct investment)

• when an entity in one country buys more than 10% of shares of an entity in another country or sets up a foreign subsidiary

• e.g Apple Australia is a foreign subsidiary of Apple

investment

• buying g.a.s used to produce other g.a.s

• e.g machinery, raw materials, building warehouses

foreign savings

foreigners providing money to Australian businesses

why is Foreign investment good for countries?

• foreign investment increases supply of savings available to finance investment –> increased economic growth and jobs

  • allows interest rates to be lower

• FDI can also bring improvements in new technology

advantages of TNCs

also how many people do foreign affiliates of TNCs employ globally?

• Brings foreign investment to developing countries

• New capital / technology which could benefit developing countries

• Generates new employment and incomes

  • foreign affiliates of TNCs employ ~80 million people globally

disadvantages of TNCs

• Profit repatriation – profit flows home instead of being invested locally

• Bargaining power imbalance for foreign company setting up subsidiaries in developing countries

• Tax avoidance

advantages of advancements in technology and

transport

what does the advancement in transport allow for?

• Internet and digital services (1990s – present)

  • Cheaper and more reliable international communication through high-speed broadband – allows for the provision of commercial services to customers worldwide

  • 2023 OECD study – estimated the proportion of the global population using the internet increased from 7% in 2000 to 74% in 2026

  • E.g online shopping

• Advances in transportation allow greater labour mobility between economies and increased accessibility to tourism and travel for consumers

  • e.g high-speed rail networks

disadvantage of advancements in technology, transport and communication

• Digital networks can also spread misinformation, enable cyberattacks, increase surveillance and allow governments to restrict access to global information flows

• Advantages in transportation often come at the cost of environmental damage

division of labour

How the tasks in the production process are allocated to different people in different countries around the world

i.e Countries specialising in producing g.a.s they can make relatively most efficiently then trading with each other

UN estimates there are — million international migrant workers

~168

what is driving labour migration into higher-income countries?

• Shortages of skilled workers and better pay and job opportunities

• e.g US experienced net migration of 5.8 million in 2021-25

Negative impacts of migration on developing countries

• Brain drain – skilled workers from developing countries will move to developed countries for higher salaries

• E.g Foreign-trained health professionals account for 31% of medical workforce in Australia

positive impacts of migration for developing countries

• Remittances – significant source of household finance for developing countries

  • Economies received remittances from overseas of US$856 bil in 2024 with India, Mexico and the Philippines being the main destinations

international business cycle

fluctuations in the level of economic activity in the global economy over time

Factors that strengthen the international business cycle (Why is growth rate of countries now more correlated?)

trade flows, financial flows, investment flows

• Increased trade flows – if there is a boom/recession in one country – this will affect demand for g.a.s in other countries

• Increased financial flows

• Increased investment flows

• Global interest rate levels

Factors that strengthen the international business cycle (Why is growth rate of countries now more correlated?)

TNCs (not necessarily good impacts)

a single decision made at a corporation’s headquarters can directly cut jobs + reduce spending across all countries it operates in

Factors that strengthen the international business cycle (Why is growth rate of countries now more correlated?)

Financial market confidence

e.g events that threaten global stability (e.g US announcing it would impose tariffs in 2025) can spark an immediate downtown in share values

Factors that strengthen the international business cycle (Why is growth rate of countries now more correlated?)

Commodity prices

e.g 2026 Middle East conflict created major oil supply shock saw oil prices rising

Factors that strengthen the international business cycle (Why is growth rate of countries now more correlated?)

International organisations

e.g G7 and G20 can act as unofficial forum for coordinating global macroeconomic policy

Factors that weaken the international business cycle (Why are there differences in economic growth levels between different countries?)

eco. policy, structural factors, regional factors

• Interest rates

• Government’s domestic economic policy decisions

• Fiscal policy

• Exchange rates

• Structural factors

  • countries have different levels of resilience in their financial systems

  • e.g different levels of innovation and take-up of new technologies

• Regional factors

  • e.g some economies are closely integrated with their neighbours and are thus influenced by economic performance of major trading partners

free trade

refers to a situation where governments don’t provide artificial advantages to domestic firms

free trade agreement

formal agreements between countries designed to break down barriers to trade between those nations

absolute advantage

a country can produce more of a good or service with the same amount of resources

• Explains trade when each country is best at something different

• Cannot explain why a country best at everything still trades

Comparative advantage

economies should specialise in producing goods or services they can produce at the lowest opportunity cost

• Applies even when one country is more productive at everything

Advantages of free trade: efficiency

• Resources move to their most productive use as economies specialise in producing g.a.s they can produce at the lowest opportunity cost

• Improved allocative efficiency

• E.g Australia specialises in natural resources and agricultural products (in which we have a comparative advantage) while importing manufactured goods and electronics

Advantages of free trade: consumer benefits

• Lower prices

• Wider range of g.a.s available

• Rises in real incomes and living standards

• E.g FTA remove import taxes on items such as cars, clothing, cosmetics

Advantages of free trade: scale and competition

• Domestic businesses face greater competitive pressures from foreign producers which encourages domestic industrial efficiency

• Competition encourages productivity and innovation

• Firms can sell beyond a small domestic consumer base

• E.g Australian agricultural producers can export larger volumes to international partners (e.g Chinese and Asian markets)

Disadvantages of free trade: unemployment

give an example

• Domestic businesses competing with imports will likely contract – resulting in structural unemployment

• E.g Australia’s car industry (Toyota Australia, Ford Australia, Holden) came to a complete close in 2017

  • Due to Australia removing protections for car industry in 1970s-80s

  • increase in structural unemployment

Disadvantages of free trade: vulnerability

• Greater exposure to global downturns

• Supply chain disruption transmits quickly

  • E.g during COVID, Australia faced severe shortages of hand sanitiser in early 2020 as a result of little domestic production

Disadvantages of free trade: national security may be undermined

• if an economy is dependent on trade during an emergency (e.g war), national security may be undermined

• If supply chains are disrupted this could result in limited access to essential items like defence equipment

role of WTO and brief history

• to implement and advance global trade agreements and to resolve trade disputes between economies

• Formed in 1995, first international organisation with powers to enforce trade agreements globally

recent activities of WTO: how many resolved trade disputes?

• Has acted as a central forum and successfully resolved over 600 trade disputes between member governments

recent activities of WTO: what was the Joint Initiative in 2024?

what does it do?

• 2024 Joint Initiative on Services Domestic Regulation

  • agreement between 72 members on services trade

• Agreement simplifies standards such as licensing and qualification requirements,

  • with an expected benefit in lower trade costs of US$125 bil globally

recent activities of WTO: what was the Trade Facilitation Agreement and when?

how does it reduce the cost of trade?

• WTO’s binding Trade Facilitation Agreement (2014)

  • aimed to reduce cost of trade by 10-15%

    • through making customs procedures simpler and more efficient

Criticisms of WTO: Doha Round

• WTO has failed to conclude a comprehensive global trade agreement since 2001

• Doha Round of trade liberalisation talks

  • began with ambitious goals to

    • reduce agricultural protection

    • lower tariffs on manufactured goods

  • failed due to disagreements between WTO members

    • e.g disputes between developed and developing nations

Criticisms of WTO: appeals body failure

what happened as a result of the appeals body failure and what must nations do instead?

• Recently US governments have refused to approve any replacement judges on WTO’s appeals body,

  • with the US wanting to diminish the WTO’s ability to impose trade rules

• As a result, the appeals body can’t enforce WTO rules –>

  • nations must resolve their disputes through informal arbitration

Criticisms of WTO: bias towards developed nations

• Wealthy nations and multinational corporations often dominate agenda-setting

  • results in bias towards developed nations

role of IMF

• maintain international financial stability

• Emergency lending in balance of payments crises (financial assistance)

  • IMF often requires countries to change their economic policies and open up their markets before they receive financial assistance

• Economic surveillance

brief history of IMF

conceived in 1944 at a UN conference where 44 allied nations sought to prevent a repeat of the destructive trade wars and currency devaluations of the Great Depression

recent activities of IMF: Ukraine

Ukraine secured $US 8.1 bil IMF program in Feb 2026 as part of international support to manage wartime economic pressures

recent activities of IMF: July 2021 - developing economies

• IMF approved a US$650 bil emergency aid fund

  • to assist developing economies in buying and rolling out vaccines

  • and paying down debt accrued during pandemic

recent activities of IMF: El Salvador

El Salvador received an IMF disbursement of SDR ~102 million October 2026

Criticisms of IMF: Conditions of loans

• IMF make loans conditional of the implementation of certain economic policies,

  • often involving reduced government borrowing and higher interest rates to stabilise the currency,

  • which appeared to make conditions worse for the economies affected (e.g Asian crisis 1997)

• IMF mandated severe structural adjustment and fiscal austerity programs during the 2010s sovereign debt crisis in Europe

  • which disproportionately harmed specific socioeconomic groups in society (such as public sector workers) while protecting financial institutions

Criticisms of IMF: Loss of national sovereignty

• IMF conditionality and strict austerity measures can force governments to change budgets, laws, tax structures etc.

  • e.g IMF required Jamaica’s removal of import quotas and tariffs in 1970s as a loan condition

Criticisms of IMF: US veto

• US holds ~16.5% of votes,

• above 15% needed to block the 85% supermajority required for major decisions

  • US has an effective veto

role of world bank

to reduce global poverty and improve living standards by supporting economic development in developing countries

• Provides developing nations with low interest loans (for economic development), grants and policy advice

world bank brief history

established in 1944 as UN Monetary and Financial Conference to rebuild war-ravaged Western Europe

recent activities of world bank: COVID-19 - helping developing countries

• In response to COVID-19 recession, World Bank committed US$157 bil in funding to over 100 lower-income countries

• to help them obtain vaccines, strengthen healthcare and reduce economic damage from the pandemic

recent activities of world bank: Argentina

Launched a country partnership with Argentina in October 2026 to mobilise responsible private investment in copper and lithium

recent activities of world bank: Bolivia

Established a critical minerals and economic diversification compact in October 2026 in Bolivia to modernise legal frameworks

Criticisms of World Bank: disproportionate control + voting shares

• Voting shares are weighted based on financial contributions rather than population or democratic representation,

  • giving G7 countries and the US disproportionate control over decisions

Criticisms of World Bank: US veto

• By convention the president of World Bank is always a US nominee and the US remains effective veto power of key structural changes

UN role and when established?

• Global organisation aiming to maintain international peace and security, protect human rights, deliver humanitarian aid and promote sustainable development

• established 1945

how has UN contributed to globalisation

• Decision making powers are limited as it relies on the support of its member states

• Has overseen development of a large number of international agreements to enforce human rights and political freedoms

• UN has contributed to globalisation by establishing the institutional and legal frameworks that enable international cooperation and trade

what is OECD

what are they committed to

International economic organisation of 38 mostly advanced economies committed to democracy and open markets

Organisation for Economic Cooperation and Development

role of OECD + how does it contribute to globalisation

• Main role is to conduct and publish research on a wide range of economic policy issues

  • and to coordinate economic cooperation among member nations

• Helps member nations become more interconnected

  • contributing to globalisation

government forum

regular formal meetings of heads of government that address areas of common interest

why was G7 formed and what is it?

• Formed mid 1970s after oil shocks

• Unofficial forum of major advanced economies that meet to coordinate global economic policy, security and international development

criticism of G7

• Not representative of all countries – only industrialised economies

• China and India are more important to the global economy than Canada and Italy but are not included in the G7

• G7 nations only cover around 10% of world’s population

why was G20 formed and what does it do

• formed in 1999 in response to late 90s financial crises

• Brings together major developed and emerging economies to coordinate economic policy, trade and sustainable growth

how did G20 impact global economy in GFC

• Played a key role in global response to GFC in 2009

  • Member nations coordinated trillions in fiscal stimulus and improved supervision of the global financial system

why is G20 a better representation of the global economy than G7

how much of the world’s population and global GDP does the G20 cover?

• Better representation of global economy than G7 – includes emerging economies (e.g China and India)

• Covers 80% of world population and ~85% global GDP

trading bloc

A number of countries

join together

in a formal preferential trading agreement

to the exclusion of other countries

when was EU established and what is it

• Established late 1950s

• Political and economic union of member states that operate to dismantle trade barriers, and integrate policies and economies across Europe

• Highest degree of economic integration in the world

  • monetary union – involves adopted of common currency (euro) and common interest rates

what % of goods exports of EU go to other members of the EU?

61%

when and why was Asia Pacific Economic Union forum (APEC) formed?

Established in early 1990s in response to formation of trading blocs such as EU

what does APEC do

• Though APEC meetings have never resulted in a regional trade agreement,

  • they have created a forum for the leaders of member countries to discuss geopolitical priorities and

  • have helped develop other trade agreements (e.g CP-TPP)

• They promote free trade, investment, and sustainable development in Pacific Rim

when was Association of Southeast Asian Nations (ASEAN) established and what sort of economies does it consist of

Established in 1967, consists of emerging and developing economies in SE Asia

what does ASEAN do

• Intergovernmental forum and regional trade bloc

  • to promote regional peace, stability and economic growth in Southeast Asia

• Has acted as a counterweight to APEC forum – tends to be dominated by large economies (e.g US, China, Japan)

• ASEAN Trade in Goods Agreement (ATIGA) has removed most intra-bloc tariffs

what does USMCA do

• Serves as primary legal and economic framework governing trilateral trade, supply chains and nearshoring across North America

• Acts as institutional backbone for North American manufacturing – reduces reliance on external supply chains (e.g China)

Examples of trading blocs Australia is a part of

• RCEP – world’s largest trading bloc including ASEAN

• CPTPP – operates as a free trade area

advantages of monetary unions (e.g EU)

• Eliminates exchange rate risk and conversion costs of trade within the union

• Members import the credibility and low inflation of an independent central bank

• Bigger capital markets and lower borrowing costs for smaller members

• Bigger + more liquid financial markets to raise money for euro

disadvantages of monetary unions (e.g EU)

• Members surrender independent monetary policy and nominal exchange rate as stabilisation policies for their economies

• One interest rate for economies and different points in the business cycle – fluctuations in the business cycle cannot be stabilised effectively

• The Euro area does not fully meet optimum currency area criteria – limited labour mobility, no large central fiscal transfers

advantages of multilateral FTA

• Widest liberalisation – benefits apply to all participants at once

• Most favoured nation treatment prevents discrimination between members

• A single set of rules lowers compliance costs for exporters

• Smaller economies gain leverage they would not have bilaterally against major powers

disadvantages of multilateral FTA

Very difficult for countries to agree on – makes agreement slow or impossible

advantages of bilateral FTA

• Far quicker to negotiate and conclude than a multilateral FTA

• Terms can be tailored to the 2 economies

• Serves broader diplomatic and strategic relationships

disadvantages of bilateral FTA

• Makes it harder to negotiate multilateral agreements (since a country will already have other agreements with other countries)

• More likely to lead to trade diversion

  • countries in a bilateral FTA may trade more with each other at the expense of trade with other more efficient countries because of the impact of a trade agreement’s provisions

• The larger economy often has more bargaining power

example of bilateral FTA australia is a part of: Closer Economics Relations Trade Agreement (CERTA)

what is it, what does it do, when did it begin?

• Australia’s trade agreement with New Zealand

• Began in 1983

• Prohibits all tariffs and export restrictions

• In recent years – been extended to include coordination of business regulations and tax laws between NZ and Australia

protection [on domestic industries]

government policies that give domestic producers an artificial advantage over foreign competitors

reasons for protection

what is infant industry argument?

Governments should protect a new industry to give it time to grow + achieve economies of scale

reasons for protection

infant industry argument: for

why would an industry need to be protected and what is an example of this being successful?

• When an industry is just starting out, it will start out on a small scale with costs that are relatively higher than those of established competitors in other countries

• These infant industries may need to be protected from competitors in the short term so they can grow, establish markets and achieve economies of scale so they can compete in the global economy

• Protection is meant to be temporary and removed once the industry is viable

• E.g Japan put protections on their car industry and they removed the protections in the 60s and it was successful

reasons for protection

infant industry argument: against

what are the issues with this argument?

• Governments rarely pick the right industries to protect accurately and political pressures keep protection after the infancy argument expires

  • E.g Australian car industry was protected for ~50 years and was still not profitable, when the government removed protections for car industry

• Protection is meant to be temporary

• If protectionist policies aren’t removed, there will be no incentive for the industry to reach a level of efficiency that would enable it to compete without protection

reasons for protection

domestic employment argument: for [economists don’t like this argument]

why and how would an industry need to be protected to keep jobs in industries?

• If an industry is facing pressure from overseas, they will lobby the government to put tariffs/protections on the industry because they will lose jobs

• If local producers are protected from competing against cheaper imports, the demand for local goods will be greater and this will create more domestic employment

• Job losses are concentrated in particular regions and occupations where re-employment is low

• E.g most of Australian car industry was concentrated in SA