Topic 1: The Global Economy

Globalisation

the integration between different countries and economies and the increased impact of international influences on all aspects of life and economic activity

Major indicators of economic growth:

• international trade in goods and services

• international financial flows

• international investment flows and transnational corporations

• technology, transport and communication

• the movement of workers between countries

Gross World Product

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

Example of international and regional trade groups:

• World Trade Organisation

• European Union

  • Association of South-East Asian Nations (ASEAN)

Composition of trade

The mix of what goods and services are traded

Define FOREX markets

Where networks of buyers and sellers exchange one currency for another

Define exchange rate

The value of a currency expressed in terms of another currency

Main drivers of global financial flows:

Speculators and Currency traders

Speculators

Investors who buy or sell financial assets with the aim of making profits from short-term price movements

Main benefit of greater global financial flows

• Enable countries to obtain funds that are used to finance their domestic investment (investors in countries with low national savings levels would not be able to finance large-scale business and investment programs)

  • May enable countries to achieve higher levels of investment and therefore economic growth than would otherwise be possible

Negative effects of greater global financial flows

• Speculative behaviour can cause significant volatility in foreign exchange markets and domestic financial markets (herd mentality): once an upward or downward trend in asset prices is established, it continues

International Monetary Fund

An international agency that consists of 190 members and oversees the stability of the global financial system. Its main functions are to ensure the stability of exchange rates, adjustment and convertability

One significant measurement of investment is

the expansion of foreign direct investment (involves the movements of funds directly invested in economic activity of the purchase of companies). Reforms in developed and developing countries have allowed for this

FDI refers to

the movement of funds between economies for the purpose of establishing a new company or buying a substantial proportion of shares in an existing company (10% or more), with the intent of exerting managerial control.

What is the role of TNCs in global investment flows?

Vital. Often they will have production facilities in countries around the world, sourcing inputs from some countries, manufacturing in another etc. They account for roughly half of the global trade

Role of technology in globalisation

They facilitate the integration of economies:

• Developments in freight technology (micro warehouses nearby)

• Cheaper and more reliable international communication through high speed broadband → provision of commercial services

• High speed networks that allow money to move around the world

• Smartphones, disrupting structure of industries

  • Transportation such as longer nonstop flights

International division of labour and migration in globalisation

• Labour markets differ because they are far less internationalised

  • Mostly affects the top and bottom ends of the labour market: highly skilled are attracted to larger, higher-income economies, while countries like Australia and New Zealand suffer from brain drain of some of the most talented and skilled workers → other countries for greater rewards

Low skilled labour may also be attracted because

• Advanced economies require it where it may be difficult to attract sufficient people born locally to do certain types of work

Low skilled workers usually remit, meaning they

send their earnings from higher wages back to their families at home

The trends reflect international division of labour meaning

they move to jobs where their skills are needed while globalisation of the labour market is increasing but there are still significant barriers to working in other countries

International division of labour barriers include

• Immigration restrictions

• Language

• Cultural Factors

  • Incompatible educational and professional qualifications

International division of labour is

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

What does offshoring do

it allows companies to shift production between countries to reduce production costs

International division of labour also reflects what economic concept?

Comparative advantage → economies should specialise in the production of goods or services produced at the lowest opportunity cost (developing economies = labour, advanced = specialised service aspects)

Business Cycle refers to

fluctuations in the level of economic grwoth due to either domestic or international products

Gross Domestic Product is

the total market value of all final goods and services produced in an economy over a period of time

Transmission of economic conditions from one country to another is made more immediate by increased integration:

Trade flows: boom or recession in one country will impact the demand for goods and services from other nations

Investment flows: economic conditions will affect whether countries will invest in other countries

Transnational Corporations: TNCS are increasingly important by which global upturns and downturns are spread throughout the global economy

Financial flows: short term financial flows also play an important role

Financial market and confidence: animal spirits

Global interest rates: higher economic growth makes it necessary for increased central banks, other economies may feel pressure to follow suit. IE Inflationary pressures

Commodity prices: the key price of commodities such as energy, minerals etc are set by global markets, therefore their prices influence inflation, investment, employment, growth etc

International organisations: forums like the Group of Twenty influence economic activity

Factors that strengthen the international business cycle:

• Trade flows

• Investment flows and investors’ sentiment

• Transnational corporations

• Financial flows

• Technology

• Global interest rates

  • International organisations

Factors that weaken the international business cycle

• Domestic interest rates

• Government fiscal policies

• Other domestic economic policies

• Exchange rates

• Structural factors

  • Regional factors

Regional factors are defined as

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

Comparative advantage

the economic principle that nations should specialise in the areas of production which they have the lowest opportunity cost, and to trade with other nations to maximise both nations’ standards of living

Opportunity cost

Represents the alternative use of resources. Often referred to as the “real” cost, representing the cost of satisfying one want over an alternative want.

Free trade

Governments impose no artificial barriers to trade that restrict the free exchange of goods and services between countries with the aim of shielding domestic producers from foreign competitors

The argument for free trade is based on

the economic principle of comparative advantage. Comparative efficiency is measured by the opportunity cost of producing each good

Advantages of free trade

• Allows countries to obtain goods and services that they cannot produce themselves or in insufficient quantities to satisfy domestic demand

• Allows countries to specialise, meaning better resource allocation and increased production

• Encourages the efficient allocation of resources, more efficient use of resources as countries drift towards comparative advantage

• A greater specialisation leads to economies of scale, which lowers average costs of production, increasing efficiency and productivity

• International competitiveness will increase as domestic businesses will face pressures from foreign producersand governments will encourage domestic industrial efficiency

• Free trade encourages innovation and the adoption of new technology and production processes throughout the world

  • Free trade leads to higher living standards resulting from lower prices, increased production and increased consumer choices

Disadvantages of free trade

• An increase in UE may occur → domestic businesses can;t compete with imports, however it should correct itself

• It may be difficult for less advanced economies to establish new industries (infant industry argument)

• Production surpluses may be dumped (sold at unrealistically low prices) on the domestic market → may hurt domestic industries (dumping argument)

  • National security may be undermined if an economy is dependent on trade in emergency, such as war or pandemic. (defence and national security)

Other arguments in favour of protection:

• Differentials in wage levels in high and low economies → artificially low labour costs are present in many developing economies because of weak labour standards (restrictions on workers rights)

• A growing awareness of the existence of modern slavery

  • Environmental factors → some countries may not be sustainable, some countries may introduce “carbon tarriffs”

What is the point of protection?

Essentially to reallocate resources towards domestic producers from countries, hence lower living standards and reducing global world product

Tarriff definition

Government imposed tax on imports: makes prices of imported goods increase, making domestic producers more expensive

Economic effects of tarriffs

• Stimulates domestic production and employment

• Domestic industries reallocated to protected industries