(1) The Global Economy

Global economy

When economies of individual countries are linked to each other and changes in a single economy can have a ‘ripple effect’ on others

Major indicators of the integration of economies include:

• International financial flows

• Movement of workers

• International trade in goods and services

Gross World Product

The aggregate value of all goods and services produced worldwide each year in the global economy

How is GWP calculated

It is the sum of all countries GDP over a period of time

Globalisation

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

Positives of globalisation

• Increased trade

• Increased financial inflow through Foreign investment

• Increased pool of labour

Negatives of globalisation

• Increasingly disruptive due to global financial events such as GFC and COVID

• During financial downturns the growht of global trade has contracted faster than world economic output, highlighting trade volatility

Australia’s export composition from 1995 - 2020

• A decrease in manufacturing 6%

• Decrease in agriculture 1%

• Increase in minerals 2%

• Increase commercial services 24%

Financial flows

Flows of money across borders related to financing economic activity, risk mangement and currency conversion

Capital controls

Different measures taken by central banks, governments and other regulatory bodies to limit the flow of FDI in/out of the country

What are some examples of capital controls

Taxes, tariffs, legislation, volume restriction, and market based forces. China limits the ability of domestic citzens’s to acquire foreign assets and foreinger’s ability to buy domestic assets.

Different types of international markets that money ‘flows’ through:

• Financial Capital Markets (long term debt and equity)

• Money markets (Short term debt)

• Derivative markets (the trade of derivatives to minimise risk in areas such as interest rates)

• Foreign exchange markets (including foreign currency)

What is the largest proportion of financial flows?

Short term speculation

Speculators

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

Foreign exchange markets

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

Exchange rate

The value of a currency expressed in terms of another currency

Foreign direct investment

The movement of funds between economies with the purpose of establishing a new company and is usually seen through an investment in a foreign business (>10% stake).

Multinational Corporation

Any enterprise that had facilities and other assets in at least on country other than its home country

Transnational coporations

Similar to MNCS, but they have a more dispersed management structure

Short term trend in FDI

Halved from 2016 to 2020 after less mergers and acquisitions and increased economic uncertainty

Debt

Debt is finance provied to a compnay by a third party, such as a financial institution, and the cost is paid back in interest Eq

Equity

It is provided by the owners/shareowners and the cost is paid back in dividends

Technological developments that facilitate integration include:

• Developments in freight tech

• Cheaper/more reliable communication

• Advances in transport allow greater mobility of labour

Technology improves:

• Productive capacity (creating surpluses that can be sold internationally)

• Transportation, enabling goods and services to be moved efficiently

• Communication technology

International division of labour

The dividing up of labour tasks across borders

Influence of interest rates on Australian output levels:

RBA found that 63% of changes in the level of output in Australia can be explained in changes in interest rates

Economic conditions enabled by globalisation

• Trade flows

• Investment flows

• Transnational corporations

• Financial flows

• Financial market and confidence

• Global interest rates

• Commodity prices

• International organisations

Free trade

A situation where the government doesn’t impose artifical barriers to trade that restrict the free exhnage of goods and services between countries with the aim of shielding domestic producers from foreign competitors

Main reason for free trade

To open the market

Main reason for closing free trade

Protecting domestic industries

Comparative advantage

Even if one country can produce goods more efficiently than another country, trade will still benefit both countries if each specialises in the production of the good in which it is comparatively efficient

Absolute advantage in free trade

Ability to produce a greater quantity of a good or service than competitors using the same amount of resources (same amount produced for cheaper)

Comparative advantage in free trade

The theory that countries should specialise in areas of production so they have the lowest opportunity cost and trade with other nations so as to maximise living standards

Role of WTO

To implement and advance global trade agreements and resolve trade disputes between countries

Role of International Monetary Fund

Maintain financial stability, particularly in foreign exchange markets

Role of World Bank

To help poorer countries with their economic development

Soft loans

Loans at little or low interest to support the private sector in developing countries

Role of United Nations

Develop and maintain international agreements and treaties around human rights, political freedom, environmental standards and other regulations

Role of the Organisation for Economic Cooperation and Development

To conduct and publish research on a wide range of policy issues and to coordinate economic cooperation amongst member nations

What is the purpose of Economic forums

World forums play an important role in coordinating policies between major economies, especially during times of economic or financial crisis

What is protection

Defined as any type of government action that has the effect of giving domestic producers an artificial advantage over foreign competitors

What is dumping

When countries put goods into a market at a low price to price out domestic producers, than raise prices as there is no competition

Methods of protection:

Subsidy, Tariff, Quota, Local Content Loans and Export incentives