HSC Economics Topic 1 - The Global Economy

The Global Economy

The integration, interconnectedness and interdependence between economies of individual countries.

Economic Integration

Goods, services, labour and resources can move freely between economies

GDP

Monetary value of all goods and services produced in an economy each year

Real GDP

Adjusted for inflation

Contributors to the Global Economy

Advanced economies (market based, focused on services), emerging and developing economies (focused on manufacturing)

Emerging Economies

Are developing rapidly (China and India)

Developing

Need of assistance to grow (Mexico and Brazil)

Gross World Product

Total value of goods and services produced in a world over a period of time.

Measurement of GWP

Countries GDP at purchasing power parity (PPP) in USD (takes cost of living and accurate price in countries)

Gobalisation

The integration, interdependence, and interconnectedness between different economies.

Advantages of Globalisation

Boosts global and economic growth, more access to diverse goods

Disadvantages of globalisation

Worsens wealth inequality, harm domestic industries, increased competition

Drivers of Globalisation

New markets, labour mobility, technology

Indicators of Gobalisation

Trade, financial flows, investment and TNCs, technology transport and communication, and international division of labour and migration.

Trade

Sale of Goods and services across national borders (GWP is increased when trade is)

Composition of Trade

The mix of what goods and services are traded

Trade Flows

Indicator of globalisation, trade has grown due to new technology

Composition/direction of global trade

Changing trends in demand for different goods and services and direction of trade flows have changed, reflects changing importance of different economic regions.

International financial flow

Movement of money for the purposes of speculation, investment or trade

Main drivers of financial flow

Speculators, financial deregulation

Foreign exchange markets

Networks of buyers and sellers exchnaging one currency for another in order to facilitate flows of finance between countries

Exchange Rate

Value of a currency expressed in terms of another currency

Advantages of Financial Flows

Countries can obtain funds that are used to finance their domestic investment

Disadvantages of Financial Flows

Financial contagion (spread of market disturbances which infects the integrated economies)

Foreign Direct Investment (FDI)

Individuals or businesses invest their funds into. businesses in foreign economies for the purpose of establishing a new company or buying a large proportion of shares in an existing company.

Causes for growth of FDI’s

Government policies of deregulation encourages FDI, developed nations have greater industrial capacity and larger consumer markets to support FDIs.

Global Investment

Longer term, flows of money to buy/establish business as investment.

Global finance

Shorter term, speculative shifts of money as finance

Transnational Corporations (TNCs)

Global companies that dominate global product and factor markets.

Investments made by TNCs

Involves the expansion of businesses globally in hopes of reaching larger market and making more profits, aim of investments = receive a share of companies profits without being involved in operations.

Role TNC’s

Global investment flow - expand production facilities worldwide, they bring foreign investment, new technologues, skills nad knowledge, job opportunities and capital.

Technology flow

Technological developments facilitates the integration of economies, cheaper and more relaible internaitonal communications, globalisation in finance/investment, smartphones + mobile internet access, more competition, greater labour mobility.

International division of labour

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

Brain Drain

Highly skilled workers go overseas to rich economies for better employment opportunities and higher pay

Outsourcing

High income economies outsource some work from low skilled workers in emerging and developing economies because of lower wages.

Migration

Movement of people between countries on a long term basis for employment opportunity, trends in migration reflect the international diviison of labour.

Globalisation and the business cycles

Business cycles on individual economies have become synchronised due to globalisation

Regional business cycle

Fluctuations in economic activity in a geographical region over time, such as trade/output

International business cycle

Fluctuations in the level of economic activity in the global economy over time such as GDP/output

Factorings Strengthening Business Cycle

Reduced trade barriers increases overall volume of trade, trends of derengualtion increased financial integration, increases TNC’s global supply chains and FDI, improved transport and communication

Factors Weakening Business Cycle

Protection decreases overall trade volumes, fluctuations in exchange rate markets cause volatility to domestic currencies, exploitation of workers in developing countries can weaken support of globalisation

International Tra

Free Trade

There are limited or no artificial barriers imposed by the government for trade of goods/services between countries

Advantage of Free Trade

Efficient production of various goods and services recquire different resource combinations and technolgies, which are found in different geographical locations

Comparative Advantage

A country has the lowest opportunity cost when producing a good than another, meaning they make efficient use of resources in production

Absolute Advantage

A country can produce more output with the same resources as another country

World Trade Organisation (WTO)

Created 1995, monitors world trade, implements global free trade agreements, resolves trade disputes

International Monetary Fund (IMF)

Created 1944, maintains the stability of the global financial system, promoting exchange rate and financial stability, facilitating the expansion of international trade, provides financial support to nations preventing poor financial management, lending to memebers experiencing blanace of payments difficulties.

World Bank

Created 1944, promote economic development in developing nations by influencing macro and micro policies, provides developments assistance (foreign aid and loans), support for long term investment projects, goals of reducing inequality and poverty

United Nations

Created 1945, global political and human rights issues, important in supporting greater linkages between economies and promoting globalisation, limited decision-making powers

Organisation for Economic Cooperation and Development (OECD)

Created 1961, supports sustainable economic growth and development, aiding global development by providing specialist advice to member nations, publishes regular reports on members economic performance.

G7 Forum

Formed 1967, G7 is now indecline as there is a shift in the global balance of power towards emerging economies like China

G20 Forum

Made 1999, coordinated fiscal and monetary stimulus to stabilise financial markets, improve supervision of global financial systems, main activity is its annual summit

Trading Blocs

Countries join together in a formal preferential trading agreement.

Free Trade Agreement

Multilateral or bilateral agreements between countries designed to reduce trade barriers between these nations.

Monetary Union

Group of countries share a common currency and interest rate.

Advantages of Bilateral Trade Agreements

Sell more exports and have closer political relationships

Disadvantages of Bilateral Trade Agreements

Trade diversion (only trading with agreed countries) and the global economy may become divided along regional lines

Advantages of Multilateral Trade Agreements

Most effective way of achieving trade liberalisation on a global basis - non exclusive and lead to trade creation

Disadvantages of Multilateral Trade Agreements

Reduction in trade barriers takes longer as waiting for agreements is lengthy.

Protection

Government policies that give domestic producers an artifical advantage over foreign competitors such as tariffs on imported goods

Reasons for Protection

Protecting infant industry, preventing dumping, protecting domestic employment, defence and self sufficiency

Methods of Protection

Tariffs, quotas, subsidy, local content rules, andexport incentives

Tariffs

Taxes on imported goods imposed for the purpose of protecting Australia’s industries

Quotas

Restrictions on the amounts of quantity of specific kinds of goods that may be imported

Subsidy

Financial assistance from governemnt to domestic businesses to encourage production, influencing the allocation of resources in an economy

Local Content Rules

Specify that goods must contain a minimum perdentage of locally made parts

Export incentives

Domestic producers given assistance such as grants, loans, marketing or technical advice.

Effect of Protection on Domestic Economy

Distorts resource allocation and income distribution, inflation, slower economic growth, and exports may be lower

Effect of Protection on Global Economy

Reduced access to markets, international trade barriers, global political tensions, and reduced trade and economic growth

Economic Growth (vs ED)

Quantitative measure of the performance of an economy (change real GDP over time)

Economic Development (vs EG)

Qualitative measure of performance, and the structural changes needed for growth to occur in the economy and to sustain increases in living standards

Human Development Index (HDI) Measurement

0-1, life expectancy, education, GNI per capita

Relationship between economic growth and development

Economic growth generally brings economic development alongside it, but not guaranteed

Distribution of Income

Comparison of annual incomes, which are direct returns from factors of production

Distribution of Wealth

Comparison of asset ownership of citizens and global dist. of wealth is more uneven/inequitable than the global distribution of income

Income indicator

GNi and GNI per capita

Quality of life indicator

HDI, Population growth rates and urbanisation

Advanced Economies

High incomes levels, high levels of ED, market based economies (USA, Australia)

Emerging Economies

Income levels vary, strongest growth rates in world, large manufacturing (China, India)

Developing Economies

Low income levels, moderate growth rates, reliant on agriculture and foreign aid (Madagascar, Yemen)

Difference Btw Nations - Global Factors

Global trade systems (restriced market access), Global financial architecture, Global aid and assistance

Difference Btw Nations - Domestic Factors

Economic resources - natural resources, labour supply and quality, low per capita incomes.

Institutional Factors - political and economic institutions, economic policies, high levels of foreign debt

Advantages of Globalisation

International convergence of economies, benefited emerging economies, technological innovation, may achieve economies of scale, and easing trade restrictions

Disadvantages of Globalisation

Financial contagion (e.g. GFC), increased income inequality, increased negative externalities, and little to no effect on economic development

Globalisation’s effect

Caused a rapid increase in trade, investment and TNC’s

Environmental Sustainability

As economic activity increases it puts strain on the environment