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Global Economy and Globalisation – Key Terms

The Global Economy

  • International economic integration: the lowering of barriers to trade between countries; a connected market for resources, capital and goods/services.
  • The global economy also involves flows of capital, labor, technology and ideas across the world. Consumers can source goods and producers can source resources.
  • Globalisation is facilitated by technology, international organisations, multinational corporations, and domestic policies.
  • Gross world product (GWP):
    • Definition: the total volume of goods and services produced in the world in a given time period.
    • Purchasing Power Parity (PPP): the rates of currency conversion that try to equalise the purchasing power of different currencies.
    • The GWP is calculated using the sum of GDP for each nation, on a purchasing power parity (PPP) basis.
    • Using the PPP approach adjusts each country's GDP for differences in purchasing power due to variations in domestic prices and exchange rates.

Globalisation

  • The increased integration and interdependence between economies over time.
  • Globalisation is facilitated by improvements in technology, transportation, communication, and international organisations.
  • Globalisation leads to increased:
    • Trade in goods and services
    • International financial flows
    • Foreign investment and growth of transnational corporations
    • An international division of labour and international migration

Improved technology

  • Technology, transportation and communication facilitate globalisation: improved tech enables humans to interact with others worldwide, enabling globalisation.
  • Improvements include:
    • Productive capacity: created a surplus that could be sold internationally, and lowered prices.
    • Transportation: enabling movement of people and goods.
    • Communication technology: enables long-distance interaction and business.

Financial flows

  • Definition: Flows of money across borders related to financing of economic activity (debt, equity, money), risk management (derivatives) and currency conversion.
  • Money flows through several markets:
    • Financial capital markets: long-term debt and equity
    • Money markets: short-term debt
    • Derivative markets: trading derivatives to manage risk in exchange rates, interest rates, and commodity prices
    • Foreign exchange markets: trade of currencies

Investment and transnational corporations

  • FDI (foreign direct investment) is a component of international financial flows and involves investment in productive assets.
  • Transnational corporations (TNCs) are major sources of FDI; similar to MNCs, with international operations and dispersed, decentralised structures across countries.

International division of labour (IDL)

  • The dividing/distribution of labour tasks across the world.
  • Caused by offshoring, reallocation of resources, and specialization.
  • Offshoring and a global division of labour led to cheaper goods/services but caused structural change and unemployment in some regions.

International migration

  • Immigrants tend to move from developing economies to advanced economies.
  • Major skill levels: low-skilled and high-skilled workers.
  • Brain drain: source countries lose skills/labour.
  • Remittances: many immigrants send money home to families in source countries.

The international business cycle

  • Definition: Changes in world output (GWP) over time.
  • When economies are highly linked, changes in one economy affect others; domestic growth cycles synchronize globally, creating a global business cycle.
  • Greater integration increases synchronisation of global growth rates.
  • Upswings and downswings can occur; major economies (e.g., United States, China) can influence the cycle.

Regional business cycle

  • Definition: Variation of GDP growth rates in a region that may diverge from the global business cycle.
  • Regions may have their own cycles with limited global impact.
  • Gravity model of trade suggests trade is strongly influenced by proximity and the size of economies.

Factors strengthening the international business cycle

  • Free trade agreements: promote integration into the global economy and exposure to global demand.
  • Coordinating economic policy: through international organisations/forums, leading to greater similarities in economic performance.
  • Integrating into the global economy: growing share of trade in GDP, more financial inflows/outflows, and exposure to international news/public sentiment, which can synchronise activity across borders.

Transmission of economic shocks

  • Demand shocks: changes in global demand affecting a country's exports.
  • Financial shocks: changes in financial flows, interest rates or asset prices.

Free Trade

  • Definition: International trade of goods/services uninhibited by artificial barriers.
  • Free trade relates to cross-border goods/services trade.
  • Countries engaging in free trade would remove tariffs, quotas, subsidies and other barriers.
  • Preferential arrangements: many so-called "free trade" deals actually reduce barriers for member countries via free trade agreements (FTA).
  • Autarky: economy that is self-sufficient with no trade.
  • The opposite of free trade is autarky.

Comparative and Absolute Advantage

  • Absolute advantage: pattern of production that is most productive; an economy can produce more with given inputs.
    • Example: country with more cars produced per unit input.
  • Factor endowments: different inputs to production render some goods more efficiently in some countries.
  • Countries should produce goods they have a comparative advantage in and trade with others.
  • Comparative advantage: production with the lowest opportunity cost relative to trading partners.
  • If each country specializes where they have a comparative advantage, they can trade to achieve more efficient allocation of resources (less of one good sacrificed per unit produced).

Example of absolute vs comparative advantage (from a table)

  • Country B has higher absolute output for both goods (absolute advantage).
  • Opportunity costs: producing a book costs 2.4 units of resource; producing a computer costs 0.42 units.
  • Country B has a lower opportunity cost in books (1.5) while Country A has a lower opportunity cost in computers.
  • Conclusion: Country A should specialize in computers; Country B should specialize in books.
  • Comparative advantage relies on several assumptions:
    • Capital goods are homogeneous (usable across different production).
    • Transportation is fast and cheap.
    • Constant returns to scale.

What is protection?

  • A barrier imposed by governments to protect domestic industries from international competition; aims to improve domestic competitiveness.

Types of protection

  • Tariffs: taxes on imports.
  • Quotas: restrictions on quantity/value of imports.
  • Local content rules: require a proportion of inputs/outputs to be produced domestically.
  • Subsidies: payments to domestic producers to encourage production.
  • Export incentives: tax deductions/cost savings for exporters.

Arguments in favour of protection

  • Infant industry protection: small/new industries lack economies of scale; protection helps them grow.
  • Protection against dumping: exporting at prices below home market or production cost is unfair competition.
  • Protect domestic employment: during recessions or to prevent structural unemployment.
  • National defence: to achieve self-sufficiency in critical equipment.

Arguments against protection

  • Infant industry risk: may rely on protection and avoid innovation.
  • Dumping protection can shield inefficient domestic industries and harm consumers.
  • Protection has costs: tariffs/quotas raise prices for consumers and can reduce efficiency.

Tariffs in detail

  • Definition: tax on imported goods.
  • Effects:
    • Raise domestic consumer prices (bad for consumers).
    • Raise domestic input costs (if inputs are imported).
    • Expand domestic production and reduce imports.
    • Lower economic efficiency and misallocate resources (foreign production often more efficient).
    • Government revenue increases.
  • Diagram concepts (domestic supply/demand): autarky vs world price Pw; with tariffs Pt; imports are affected.
  • Autarky point: Qa, Pa (where domestic supply meets demand).
  • With world price Pw (no tariffs): domestic production reduces to Qs, quantity demanded rises to Qd, creating imports Qd−Qs.
  • Free trade equilibrium: Qd(FT) and Qs(FT).
  • Tariff: Pt > Pw; domestic production expands to Qs(T), domestic demand falls to Qd(T); imports shrink to Qd(T)−Qs(T); government revenue equals $(PT - PW) imes (Qd(T) - Qs(T))$.

Tariff revenue and welfare effects

  • Government revenue = $(PT - PW) imes (Qd(T) - Qs(T))$.
  • The large triangle between Qd(FT) and Qs(FT) represents imports under free trade; the small triangle (Qd(T)−Qs(T)) represents imports with a tariff.

Subsidies

  • Subsidies are payments to domestic producers to increase supply; aim to reduce production costs and expand domestic production.
  • Effects:
    • Increase domestic production and market share.
    • Reduce domestic prices.
    • Increase consumption.
    • Involve government expenditure (tax implications).
    • Potentially lower economic efficiency and misallocation of resources.
  • Subsidy diagram (conceptual): shift in the domestic supply curve from S to S1 under a price Pw; with subsidy and no trade, production can rise to meet demand domestically; government expenditure equals subsidy times domestic production.

Domestic and global effects of protection

  • Domestic effects: misallocation, economic inefficiency, less competition, slower innovation, lower productivity, slower growth.
  • Global effects: less globalisation, smaller division of labour, less specialization, lower efficiency, greater self-sufficiency, export barriers for developing economies.

Trade blocs vs free trade agreements (FTAs)

  • Trade bloc: group of countries with reduced protection against each other to varying degrees.
  • Types of trading blocs:
    • Preferential trade agreements
    • Free trade agreements (FTAs)
    • Customs unions
    • Common markets
    • Economic unions
    • Monetary unions
  • FTAs: reduce or eliminate protection against competition among member countries.
  • Why sign FTAs or join blocs:
    • Gain benefits of comparative advantage.
    • Potential trade creation (increased trade).
    • More countries in an FTA can improve efficiency; commitment to free trade helps resist domestic protectionism.
  • Disadvantages of FTAs: trade diversion (importing from higher-cost producers within the bloc rather than the most efficient outside).
  • More preferential/exclusionary agreements can cause trade diversion and reduce overall efficiency.
  • FTAs can involve special interests shaping negotiations; sovereignty concerns and domestic policy implications.

Multilateral vs bilateral trade agreements

  • Multilateral: between more than two countries.
  • Bilateral: between two countries.

Examples of FTAs and blocs

  • ASEAN (Multilateral FTA): formed 1967; members include Indonesia, Malaysia, Philippines, Singapore, Thailand, later Brunei, Vietnam, Laos, Myanmar, Cambodia. Aims to reduce tariffs to about 5% for most traded products.
  • NAFTA/USMCA (multilateral FTA): NAFTA established 1992, effective 1994; USMCA replaced NAFTA (signed 2018, effective 2020).
  • ANZCERTA (bilateral FTA): Australia–New Zealand Closer Economic Relations Trade Agreement, begun 1983; tariffs and import/export restrictions prohibited; includes agricultural products/services.
  • EU: Monetary union and trade bloc with 28 members; features an economic union (free movement of goods, services, capital, labour) and a monetary union (Eurozone, 19 countries, Euro as currency; ECB conducts single monetary policy).

The WTO and GATT

  • WTO: World Trade Organization (formed 1995; 164 members). Goals: open trade, reduce barriers, enforce rules, settle disputes, build capacity for trade.
  • GATT: General Agreement on Tariffs and Trade (predecessor to the WTO; began 1947; focused on goods trade).
  • How the WTO facilitates trade and globalisation:
    • Negotiation rounds to reduce barriers and agree on rules.
    • When rules are violated, disputes can be brought to the Dispute Settlement Body (DSB); if unresolved, other countries can impose trade sanctions.
    • Members are encouraged to resolve issues informally first.
    • The Doha Round (2001–present) focuses on developing-country access to markets, agricultural protection, environmental agreements, dumping rules, regional agreements, subsidies, trade facilitation, IP issues, and dispute settlement rules.

Effectiveness of the WTO and related institutions

  • WTO disputes: number has fallen by about half, indicating better compliance with rules.
  • Developed economies are often complainants/respondents; developing countries have fewer cases.
  • Access to dispute resolution can be limited for some; disputes often take longer to resolve.
  • More effective with smaller countries; less effective with larger economies.

The IMF

  • IMF: International Monetary Fund; aims to maintain international financial stability.
  • Functions:
    • Lends to distressed countries to prevent instability.
    • Monitors the global economy and offers policy recommendations.
    • Capacity building: helps build robust institutions.
  • Lending scenarios: when countries face balance-of-payments problems, debt service issues, financial crises, or fiscal crises.
  • Conditionality: lending is tied to structural adjustment policies.
  • Effectiveness/criticisms: mixed; criticised for limited pre-crisis surveillance, uneven crisis lending, transparency concerns; recent lending trends show larger sums with fewer conditions and more precautionary/front-loaded lending to prepare for crises.

The World Bank

  • Purpose: reduce global poverty by funding development projects in developing countries.
  • Goals by 2030: end extreme poverty (people living on <$1.90/day to no more than 3%) and promote shared prosperity by raising the income growth of the bottom 40% in every country.
  • Activities: low-interest loans/grants for education, health, public administration, infrastructure, financial/private sector development, agriculture, environment, resource management; policy advice, analysis, and technical assistance.
  • Initiatives: Heavily Indebted Poor Countries (HIPC) Initiative reduced debt by about $100 billion.

The United Nations and its bodies

  • UN: aims to improve peace/security, environment, sustainable development, human rights, health, governance, international law, and more.
  • General Assembly: forum for member views.
  • Security Council: 15 members; can authorize sanctions to discourage aggression.
  • ECOSOC (Economic and Social Council): coordinates global efforts toward internationally agreed goals and includes environmental and development concerns.

The OECD

  • Organisation for Economic Cooperation and Development (OECD): 36 member countries; established 1960 to promote economic prosperity.
  • Functions: provide policy ideas, statistics, analyses, and advice; fill informational gaps; promote market-friendly, pro-globalisation perspectives.
  • OECD role in policy coordination; example: expansionary macroeconomic response to the 2007–09 global financial crisis.

Government forums: G20 and G7/8

  • G20: 19 countries plus the EU; hosts meet annually; focus on macroeconomics and trade; discussions include broader issues (climate, health, etc.).
  • G7/8: Group of seven countries (Canada, France, Germany, Italy, Japan, UK, USA) and the EU; focus on macroeconomic issues and broader concerns like climate change.

Economic growth and development

  • Economic growth: increase in the volume of goods/services produced in an economy over time; measured by real GDP growth; achieved via higher productivity and greater use of production factors.
  • Economic development: broader than growth; structural change, infrastructure, governance and institutions, social change, material living standards, and quality of life improvements.
  • Income and wealth measures:
    • Real GNI: real GDP plus net income receipts.
    • PPP adjustments help compare living standards across countries.
    • Gini Coefficient: a measure of income/wealth distribution; 0 = complete equality, 1 = complete concentration of income/wealth.
    • Global wealth inequality is greater than global income inequality.

Human Development and SDGs

  • HDI (Human Development Index): major indicator of development; combines income per capita, education, and health.
    • Indicators include educational attainment (average years of schooling for 25-year-olds and expected years of schooling for children), life expectancy at birth, and GNI per capita.
    • HDI ranges from 0 to 1.
  • The 17 Sustainable Development Goals (SDGs) adopted in 2015 by the United Nations are key development targets.

Levels of development and causes of lack of development

  • Least-developed country (LDC): low-income with severe structural impediments to sustainable development.
  • Causes of lack of development include:
    • State capacity (government revenue, public goods, governance).
    • Weak governments; conflict and crime reduce investment incentives.
    • Institutions: property rights and contract enforcement.
    • Malaria and health burdens inhibit savings and investment (income trap).
    • Low incomes; limited savings for investment.
    • Culture and economic policies (protectionism, socialism, overregulation, taxation levels).
    • Geography: ports vs landlocked can affect growth; alignment with national/cultural identities can influence socio-political stability.
    • Lack of saving, infrastructure, capital formation, and natural resources; resource curse risks with poor institutions.
    • Human capital deficiencies (health and education).

Premature deindustrialisation and the middle-income trap

  • Premature deindustrialisation: shift away from manufacturing too early, reducing productivity gains from manufacturing.
  • Transition to services early in development may hinder long-run development prospects.
  • The middle-income trap: risk of failing to transition to advanced economy status due to low manufacturing share and limited productivity gains.

Globalisation's effects on trade, investment, and TNCs

  • Globalisation generally increases trade and financial flows; world investment has grown with technology and openness.
  • TNCs: over 100,000 TNCs; about one-third of global exports and about a quarter of value-added originate from TNCs.

Globalisation and environmental sustainability

  • Environmental sustainability has worsened with globalization as production shifts to countries with lower environmental standards.
  • Developing countries tend to have lower environmental standards; advanced economies often have higher standards.
  • The environmental Kuznets Curve suggests wealthier countries can achieve better environmental quality as they have more resources to invest in environmental protection.
  • Dematerialisation in advanced economies: increased output with less material use per unit of production; shift from manufacturing to services reduces material intensity.
  • Globalisation can place strain on natural resources due to higher growth, even with dematerialisation.

Globalisation and the international business cycle

  • Globalisation enhances the international business cycle through increased interdependence in trade, investment, and financial flows, which can synchronise growth rates.
  • It can boost growth via higher export demand and investment, particularly in developing countries with larger export markets.
  • However, it also transmits shocks across borders, potentially causing downturns or recessions in connected economies (e.g., global slowdown due to a crisis such as a pandemic impacting demand and trade).