Global Economy & International Integration – Vocabulary Flashcards

Global Economy & Economic Integration

  • Global economy: the aggregate of all countries producing goods & services (g/s) and contributing to Gross World Product (GWP).
  • Economic integration: removal/liberalisation of cross-border barriers to maximise output & efficiency.
    • Risk: financial contagion – traders shift capital after adverse news, spreading crises.

Measures of World Output

  • Gross World Product (GWP): GWP=∑Value of g&s produced globally\text{GWP}=\sum \text{Value of g\&s produced globally} (measured in USD\text{USD} for consistency).
    • Benchmark for global growth/decline.
  • GDP at Purchasing Power Parity (PPP):
    • Adjusts GWP for cross-country price & exchange-rate differences.
    • GDPPPP=Nominal GDPPrice Level Index\text{GDP}_{PPP}=\frac{\text{Nominal GDP}}{\text{Price Level Index}}
    • Allows accurate cross-country comparison.

Globalisation: Concept & Channels

  • Broad definition: integration & barrier removal between nations.
  • Key channels (★ = examined in detail):
    1. ★ Trade in Goods & Services
    2. ★ Financial Flows
    3. ★ Investment & Transnational Corporations (TNCs)
    4. ★ Technology, Transport & Communication
    5. ★ International Division of Labour & Migration

Trade in Goods & Services

  • Share of global output traded: 38 % (1990) → 50 % (2018, World Bank).
  • Drivers:
    • ↑ Trade agreements, ↓ protection (e.g. Australia’s average tariff 2.23 % in 2018).
    • Changing demand: rising affluence, tech & innovation → shifting composition (e.g. ICT, services growth).
  • Directional change:
    • Emerging economies’ share of global trade: 7 % → 19 % (past decade).
    • Example: Australia–China trade boom post-reforms.

Financial Flows

  • Most globalised sector; capital moves faster than g/s or people.
  • Enablers: ICT networks, 24-hour markets.
  • Main drivers:
    • Financial deregulation (1970s–80s).
    • Speculators/currency traders chasing short-term profit.
  • Advantages:
    • Access to overseas savings → ↑ investment → growth, esp. for low-saving nations.
  • Disadvantages:
    • ↑ Contagion risk (e.g. 2008-09 GFC).

Investment & Transnational Corporations (TNCs)

  • Foreign Direct Investment (FDI): ≥10 % equity stake → controlling interest.
    • Rising due to easing capital controls & deregulation.
  • TNCs: production chains span multiple nations; source cheap inputs, exploit lower labour costs.
    • Governments court TNCs with subsidies/tax concessions for capital & jobs.

Technology, Transport & Communication

  • Freight: standardised containers, cargo tracking, lean logistics.
  • Transport: efficient aircraft, high-speed rail → labour & goods mobility.
  • Communication: instant info flow among International Business Giants (IBGs).
    • E-commerce ↓ marketing/distribution labour costs.
    • 5G → faster connectivity → ↑ productivity.

International Division of Labour & Migration

  • ILO: ≈2 % of population lives & works outside origin country; may rise.
  • Migrant flows polarised:
    • Top end: skilled → high-income regions (EU, US) → “brain drain” from AUS/NZ.
    • Bottom end: unskilled → advanced economies filling low-skill vacancies (e.g. Latin Americans to US).
  • Offshoring: firms site labour-intensive stages where labour cheapest.

International & Regional Business Cycles (IBC & RBC)

  • IBC: synchronised changes in global GDP.
    • Impact correlates with trade openness (exports+imports % GDP).
  • RBC: within regions linked by free-trade/customs/monetary unions.
    • Core regions (share bulk of GDP):
    • North America (USMCA)
    • European Union (EU)
    • East Asia (Japan, China, ASEAN)

Free Trade: Theory, Advantages & Disadvantages

  • Occurs when tariffs, quotas, subsidies absent.
  • Concepts:
    • Absolute Advantage (AA) – produce more with given resources.
    • Comparative Advantage (CA) – lower opportunity cost.
    • Economies of Scale (EOS) – AC=TCQAC=\frac{TC}{Q} falls as QQ ↑.

Advantages

  • Specialisation based on CA → EOS → ↑ output & employment.
  • Wider, cheaper consumer choice → ↑ living standards.
  • Resource productivity ↑; competition drives innovation.

Disadvantages

  • Infant industries vulnerable.
  • Resource reallocation → structural unemployment, regional inequality.
  • Negative externalities (pollution, labour exploitation).
  • Over-specialisation, dependency, dumping, persistent CAD.

International Organisations

World Trade Organisation (WTO)

  • Multilateral trade rule-maker/enforcer; promotes liberalisation.
  • Doha Round (2001): aimed to cut advanced-economy farm subsidies; stalled.
  • Dispute settlement: e.g. Australia vs China barley 80 % tariff (2020).
  • Trade Facilitation Agreement (2017): streamline border agencies.

International Monetary Fund (IMF)

  • Oversees global financial stability; emergency lending.
    • Funds from advanced economies; low-interest loans.
    • Mar 2020: doubled lending (>$100 bn) for pandemic response; 102/189 members sought help.

World Bank (WB)

  • Development finance (loans/grants/advice) to developing countries.
  • Conditionality principle → controversy (loss of autonomy).

United Nations (UN)

  • Peacekeeping, human rights, humanitarian aid, SDGs (e.g. halve extreme poverty, gender equality).

Organisation for Economic Co-operation & Development (OECD)

  • 37 members; policy research/advice.
    • 2020: urged fiscal/monetary stimulus for COVID-19.

Government Economic Forums

  • G20 (85 % GDP, 75 % trade, 66 % population): formed post-GFC; annual summits; 2014 Brisbane → pledge to lift growth 2 %.
  • G7 (USA, Japan, Germany, UK, France, Italy, Canada): macro policy coordination; 2008 pledged >US1 trnUS1\text{ trn} to IMF; declining weight (68 % → 26 % global GDP from 1998→2018).

Trading Blocs, Monetary Unions & FTAs

  • Trading bloc: preferential intra-bloc trade plus common external tariffs.
  • Monetary union: common currency & monetary policy (Eurozone).
  • FTAs: tariff-reduction pacts.
    • Bilateral (ANZCERTA), Regional (NAFTA/USMCA), Multilateral (WTO).

Advantages of FTAs/Blocs

  • ↑ Export sales, ↓ trade costs → growth.
  • Foster political ties.

Disadvantages

  • Trade diversion from more efficient non-members.
  • Risk of fragmented global economy.

Major Blocs & Agreements

  • EU: customs & monetary union; Euro ↓ transaction costs; 17 % world export market; high agri protection (CAP subsidies 38 % budget 2016).
  • APEC: Asia-Pacific forum; non-discriminatory; 60 % GDP, 47 % trade; effectiveness limited by size.
  • NAFTA → USMCA: Canada–US–Mexico; exploit Mexico cost base; 13 % global merchandise trade; new rules on autos, agri, labour, environment (2020).
  • ASEAN & AANZFTA: eliminates tariffs on 96 % of Australian exports; 20 % of AU trade.
  • ANZCERTA: first bilateral to free trade in services; harmonised rules.

Protection: Motives & Methods

Reasons

  1. Infant industry (temporary until EOS).
  2. Domestic employment preservation.
  3. Anti-dumping.
  4. Defence/self-sufficiency & cultural preservation.

Instruments & Effects

Tariffs
  • Raise import prices; yield govt revenue; may improve CAD via substitution.
  • Downsides: retaliation, inflation, consumer welfare loss.
Subsidies
  • Cash to local producers; cheaper than tariffs for consumers; reversible.
  • Issues: fiscal cost, inefficiency, income redistribution to subsidised industry.
Quotas
  • Quantity ceilings on imports.
Local Content Rules
  • Mandate domestic input share (e.g. 55 % Australian TV content 6 a.m.–midnight).
Export Incentives
  • Grants/loans to boost offshore sales (e.g. Austrade EMDG: $1 → $13.50 return).

Domestic consequences of protection

  • Misallocation toward inefficient sectors; higher inflation; lower growth; constrained exports.

Global consequences

  • ↓ Market access (hits developing countries); ↓ trade volume, variety, living standards; income inequality; political tension (e.g. Australia–China 2019–20 trade war).

Economic Growth vs Economic Development

  • Growth: ↑ real GDP; quantitative.
    • Sources: ↑ resource use (capital widening) & ↑ productivity (capital deepening).
  • Development: structural change improving welfare; qualitative.
    • Measured via Human Development Index (HDI) (life expectancy, education, GNIpcGNI_{pc}).
    • 2019: Norway 0.95 (highest); Niger 0.38 (lowest); Australia 0.94 (6th).

Globalisation & Income Distribution

  • 1 bn people left extreme poverty since 1990; yet inequality persists.
    • Sub-Saharan Africa: >50 % still in extreme poverty.
  • Wealth concentration: richest 1 % hold 44 % global wealth (Credit Suisse 2019).
  • Oxfam: billionaires needed to match bottom 50 % fell 380 → 26 (2009→2019).

Economy Classifications (IMF)

  • Advanced (39): \bar y>USD\,30{,}000; services-centric; slower growth; 40.3 % GDP, 63 % exports (2019).
  • Emerging (155): upper-middle income, fast growth, industrialising; 59.7 % GDP, 37 % trade; BRICs key.
  • Developing: low income, high poverty, agri-reliant, high population growth.

Reasons for Cross-Country Gaps

Global Factors

  • Biased global trading system (agri protection, Doha failure).
  • Volatile short-term capital flows → instability.
  • Debt traps from heavy foreign borrowing.
  • Unequal tech diffusion.

Domestic Factors

  • Resource endowments, labour quality, infrastructure.
  • Poverty cycle (low ypcy_{pc} → low savings/investment → low growth).
  • Low tech adoption, high population growth.
  • Institutional quality: corruption, instability, weak fiscal capacity.
  • Heavy debt servicing drains growth funds.

Effects of Globalisation

Economic Growth

  • EOS & specialisation opportunities.
  • Tech diffusion ↑ productivity.
  • Contagion risk (2008–09 GFC) → need macro-coordination (G20).

Economic Development

  • Brain drain from developing to advanced economies.
  • Environmental & labour externalities.

Case: East Asia

  • China, NIEs, ASEAN → trade/FDI boom → HDI rise, massive poverty reduction.

TNC Criticisms & Examples

  • Accusations: labour exploitation, resource depletion, tax avoidance.
    • 2019 Apple labour violations (China Labour Watch) – excessive contract workers.
    • 2017 Apple Irish tax strategy (12.5 % vs OECD 21 %).

Environmental Sustainability

  • Economic growth ↑ resource use → environmental degradation.
  • Multilateral responses:
    • UN Convention on Biodiversity – protect ecosystems.
    • UNCLOS – safeguard marine resources.
    • Paris Agreement 2015 – keep warming < 2 °C (ideally 1.5 °C).
    • Targets: EU −40 % (1990 base), USA −43 % (2005 base, though US withdrew 2018 under Trump), Australia −26 % to −28 % (2005 base).
  • Developing nations least capable of adapting to climate impacts.

International Business Cycle Transmission Examples

  • 2006–07 resources boom (China/India demand) → high world growth; peak commodities mid-2008.
  • 2008–09 GFC: rapid global downturn via financial linkages.

(Exam Requirement) Case Study Prompt

  • "Undertake a case study of the influence of globalisation on an economy other than Australia …" – not provided in transcript; prepare separately.