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The Global Economy
The inegration, 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 whihc 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 sepcialist 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 traade liberlisation 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 polcies 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
Doemstic 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 livign 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