The global economy

The global economy

The system of international trade, investment, and financial flows that connect countries worldwide. It includes trade agreements, multinational corporations, and economic policies that influence global markets.

Characteristics of the global economy

Global trade, which involves the exchange of goods and services between nations.

Financial flows, which refer to the movement of money through investment and banking.

Labor mobility, where workers migrate to different countries for job opportunities, investment, which refers to the allocation of capital across borders to enhance economic activities.

Technology, which plays a significant role in facilitating global communication, production, and innovation.

Globalization

The increasing economic, political, and cultural interdependence between countries, driven by advancements in technology, communication, and trade.

Three positive effects of globalization

Increased trade, which leads to higher economic growth, lower prices for consumers due to increased competition, and faster technological advancements as ideas spread more quickly across borders.

Three negative effects of globalization

Job losses in industries that cannot compete with foreign businesses, a greater gap between the rich and the poor due to unequal benefits, and environmental damage caused by increased production and transportation.

Trade liberalization

The process of removing barriers such as tariffs and import quotas to encourage free trade between countries. This allows businesses to compete in foreign markets and increases economic efficiency.

Two benefits of free trade

It allows businesses to access larger markets and consumers to buy goods at lower prices because of increased competition.

Two drawbacks of free trade

Local industries may struggle to compete against cheaper foreign imports, and some workers may lose their jobs as businesses move production to countries with lower labor costs.

Protectionism

When a government imposes policies such as tariffs, subsidies, or import restrictions to shield domestic industries from foreign competition.

How did the US-China trade war demonstrate protectionism

The US imposed high tariffs on Chinese imports to protect American businesses, and China retaliated with its own tariffs, making goods more expensive for consumers and businesses in both countries.

Exchange rates

Exchange rates represent the value of one currency in terms of another, determining how much one currency can be exchanged for another in foreign exchange markets.

AUD depreciates

Its value decreases relative to other currencies, making Australian exports cheaper and more competitive in foreign markets. This can boost demand for Australian goods and services overseas. However, it also increases the cost of importing goods and services, leading to higher prices for consumers and businesses that rely on foreign products. Depreciation can also contribute to inflation, as the cost of imported goods rises. Additionally, overseas investments and foreign travel become more expensive for Australians.

AUD appreciates

Australian exports become more expensive for foreign buyers, reducing demand for them. Imports become cheaper, which increases demand for foreign goods. This can lower inflation since cheaper imports reduce living costs. A stronger AUD can also make Australian assets more expensive for foreign investors. which might reduce investment. Tourism to Australia may decrease because it becomes more expensive for foreign travelers, but Australians benefit from cheaper travel abroad. The appreciation of the AUD may also attract more foreign investment.

Factors affecting exchange rates

Interest rates, speculation, trade balance, government policy

How interest rates affect exchange rates

Higher interest rates attract foreign investment because they offer better returns. This increases demand for the country’s currency as investors need it to make investments, causing the currency to appreciate. Conversely, lower interest rates can lead to a depreciation of the currency.

How speculation affects exchange rates

Speculation influences exchange rates when traders buy or sell currencies based on expected future events (e.g., economic data, political changes). If traders expect a currency to appreciate, they will buy more of it, increasing its value. If they expect a currency to depreciate, they will sell it, causing it to fall.

How the trade balance affects exchange rates

A trade surplus (exports > imports) increases demand for the domestic currency because foreign buyers need it to pay for goods and services. This leads to currency appreciation. A trade deficit (imports > exports) decreases demand for the domestic currency, leading to depreciation.

How government policies affect exchange rates

Government policies, such as central bank interventions or monetary policy decisions, can directly impact exchange rates. For example, if a central bank raises interest rates, it may attract foreign investment, strengthening the currency. Central banks can also buy or sell their own currency in the foreign exchange market to influence its value.

Floating exchange rate system

Where the value of a currency is determined by market forces, such as supply and demand, without direct government or central bank intervention. The currency’s value fluctuates based on factors like interest rates, inflation, trade balances, and speculation. Countries with floating exchange rates let their currency rise or fall freely in the foreign exchange market.

Fixed exchange rate system

When a country’s currency is set at a stable value against another currency or a basket of currencies. The government or central bank controls the exchange rate by buying and selling its currency to keep it stable. This system reduces uncertainty in trade and investment but limits a country’s ability to adjust its economy through currency changes.

How covid-19 pandemic affected the AUD

The Australian Dollar depreciated due to global uncertainty and reduced demand for Australian exports. This made Australian goods cheaper internationally but increased the cost of imports.

Difference between economic growth and economic development

Economic growth refers to an increase in a country’s Gross Domestic Product (GDP) and overall production, while economic development focuses on improvements in living standards, including access to education, healthcare, and infrastructure.