eco p 2

MOST important trading bloc in the world economy - Larger than US similar size to China - Accounts for 20% of global merchandise trade - Trade between EU countries accounts for 66% of all EU trade - Customs Union: - Common external tariff average is 5.9% mode is 15% - 47% of items have no tariff - Free movement of labour and capital - EU Monetary Union: - Single currency (euro) amongst 18 members - Came under pressure during GFC and consequent Euro crisis. - Reduced transaction costs - Eliminates exchange rate uncertainty - BUT loss of national currency controls - Loss of monetary policy as a tool to solve specific issues in your domestic economy. - Benefits of EU membership - Free trade - Attractive for FDI - Huge market size - Free movement of labour and capital. - Costs of EU membership - Forced to follow EU laws and regulations - Cost of contributions to EU budget - Trade benefits accrue from FTAs instead. - Trade diversion! Reduces world allocative efficiency. BILATERAL: Trade diversion occurs when trade is diverted away from a more efficient producer to a less efficient producer due to the latter entering into a FTA Examples of bilateral: 12 - CHAFTA 2015 aimed to eliminate 86% of tariffs and then 96% on full implementation in 2029. - Services: Most-favoured nation (MVN) clause, Australia’s competitive position in services will be protected for legal services, education services and telecommunication services - AUSFTA (2005) USA. provides significant tariffs reductions on agriculture and manufacturing. Tariffs on ALL GOODS eliminated from 2015 Protection (1.3) - Reasons for protection - infant industry argument, domestic employment, dumping, defence (1.3.1) Protection: government policies that give domestic producers an artificial advantage over foreign competitors such as tariffs on imported goods. Main measures of protection include tariffs, quotas, and subsidies. 1. Infant Industry Argument New industries generally face many difficulties and risks in their early years - Start out with high operating costs - small scale Require protection in order to build capacity, establish markets and achieve economies of scale so that they can compete in the global economy. A key test for economic reliability is whether the industry protection is removed over time. Industries should reach a level of efficiency that lets them operate without protection. Disadvantages: - Firms cannot gain international competitiveness as they become reliant on protection and fail to innovate - CAR INDUSTRY: Toyota, Holden and Ford - Subsidy was $500 million a year but industry only supplied 10% of domestic demand and couldn't stay competitive due to higher costs of production than the competitors in Japan and the US. - Ceased manufacturing in Australia 2016-2017 2. Domestic employment Protection can save domestic jobs causing more domestic employment. - Argument gains support during times of recession when unemployment is rising (COVID… gas?) but economists do NOT support this argument. Disadvantages: - Protection distorts the allocation of resources in an economy away from areas of more efficient production in the long run leading to higher levels of u/e and lower growth rates. 3. Prevention of dumping Dumping occurs when firms attempt to sell their goods in another country’s market at below production costs. This practice is done to dispose of large production surpluses or to establish 13 market positions in another country as low prices can put local firms out of business allowing way for a monopoly. - Consumers gain from lower prices but foreign producers will increase prices after. 4. Defence and self-sufficiency. Non-economic reason for protection. Major powers want to retain their own defence industry in case of war meaning they do not try to rely too heavily on other countries for their national security. (Self-sufficiency argument). Self-sufficiency comes at the expense of higher living standards that could be achieved through specialisation and free trade. (COVID is showing that countries want to be more self-sufficient). - Methods of protection and the effects of protectionist policies on the domestic and global economy - tariffs, subsidies, quotas, local content rules, export incentives (1.3.2) Tariffs: A government imposed tax on imported goods for the purpose of protecting domestic industries. Pros: - Causes an extension in domestic supply, increasing production and employment - Creates a source of revenue for the government. Cons: - Contract domestic demand because consumers pay a higher price - Reduction in allocative efficiency. Represented by the deadweight loss where part of the consumer surplus is lost and never recovered in the economy. - Retaliation effect (US-China trade war) - Tariffs increase the input costs for other industries who did not receive tariff protection. - Making industries artificially competitive reduce dynamic efficiency as domestic firms have less incentive to adopt new technology to reduce production costs. - OECD estimates that every $1 in protection decreases GWP by 66 cents Facts: - Average tariff 3% (20% in 1990) 14 Subsidies: cash payments given to domestic producers to reduce the cost of production and compete more easily with imported goods. Pros: - Increase domestic production and employment - Does’t raise the price unlike tariffs or quotas - Less retaliation Cons: - Cost for the government - Increased domestic production represents increase in demand for factors of production raising factor costs for other firms who do not receive subsidies. - Domestic firms become reliant (loss of dynamic efficiency) - Can create an oversupply, which can lead to dumping. 15 Quotas: Restrictions on the amounts or values of various kinds of g/s that may be imported. Pros: - Stimulates domestic production and employment is protected - More resources allocated to protected industry Cons: - Redistribution of income away from consumers to domestic producers, resulting in lower levels of overall economic growth. - Unlike tariffs, no government revenue directly generated - Retaliation effect. DIAGRAM Local Content Rules: Specify that goods must contain a percentage of locally produced parts. Example: - 2015 one assessment criteria for overseas companies wanting to build Australia’s submarines was the extent of local manufacturing and maintenance work that would be done in Australia. - Commercial TV required to have 55% of local content between 6am to midnight on primary channel. Export Incentives: are programs that give domestic producers assistance to penetrate global markets or expand their global market share. Examples: - Grants, loans or technical advice and encourage businesses to penetrate global markets. - Australia has the Export Market Development Grant (EMDG) that provides direct funding and general assistance to local manufacturers looking to break into international markets. Overall effects of protectionism: - Reductions in trade between nations - Reduce living standards and reduce global economic growth by shielding inefficient producers - Increased difficulty for individual economies to specialise in efficient production - Negative impacts tend to be greatest for developing economies that are excluded from access to the markets of advanced economies. Globalisation and economic development (1.4) This is a frequently asked section in multiple choice. The process of globalisation has seen a transformation in the size and power of the world’s major economies. 16 - Differences between economic growth and economic development (1.4.1) Q. Describe the difference between economic growth and economic development (2 marks) Economic growth (EG) is the increase in the overall value of G+S produced by a given economy measured in the percentage rate of increase in real GDP. Comparatively, economic development (ED) refers to a country’s well being measured using trends in sustainability and quality of life as well as the Human Development Index (HDI), which involves education and life expectancy. Economic Growth: is a sustained increase in a country’s productive capacity over time. - GNI (Gross National Income) is the sum of value added by all resident producers in an economy plus receipts of primary income from foreign sources (inflation adjusted + PPP) - US and China have the largest GNI - Inaccurate to use as a comparison because it doesn't consider living standards. This is why economists use PPP - PPP (Purchasing Power Parity): a theory that states that exchange rates should adjust to equalise the price of identical goods and services in different economies throughout the world. - Divide the REAL GNI by the POPULATION generating a GNI per capita figure. - Global Wealth: Another dimension to global inequality. - Significant growth over recent decades 66% from 1995-2014 - Natural capital was the most important asset for low income countries at 47% of total wealth in 2014 - Human capital accounts for approximately ⅔ of global wealth. - Top 10% of people account for 87% of the world's wealth. (developed countries) Economic Development: is a broad measure of welfare in a nation. Includes indicators of health, education, environment, mental quality and material living standards. Human Development Index (HDI) - A measure of economic development devised by the UN - Considers: life expectancy at birth, levels of education attainment and expected years of attendance, GNI per capita. - 0 = bad 1 = good - Norway highest 0.949 (Australia 2nd 0.939) and lowest Central African Republic at 0.352 - Distribution of income and wealth (1.4.2) Income: refers to earnings of a person from contributing to production, including wages, rent, interest, profit, transfer payments, pensions etc. Wealth: refers to a person’s net value of assets (real estate, cash deposits etc.) Wealth is a stock concept which accumulates into income. Measured by the Gini coefficient - Australian Gini for income declined from 68.7 in mid 2000s to 64.9 in mid 2010s 17 - Income and quality of life indicators (1.4.3) HDI is key measure (high eco growth is usually correlated with high HDI) Millennium Development Goals (MDG) - UN Summit 2000 189 countries agreed to eight MDG goals - Improve: income, education, health and environment. - From 1995-2015 global population living in extreme poverty fell from 36% to 12% - Developing economies, emerging economies, advanced economies (1.4.4) Advanced economies; characterised by: - High levels of economic development (average income <$40,000USD) - Slower eco growth (1.8% average) - Structure of economy = service-based with advanced manufacturing - Close economic ties with each other - Liberal-democratic political/economic institutions Emerging economies; characterised by: (BRIC - Brazil, Russia, India, China) - Varying income levels - High rates of income GROWTH - Strong economic growth (5-10%) - Currently industrialising (heavy manufacturing presence) Developing economies; characterised by: - Low income levels - Human resources with poorer education and health outcomes - Industrialisation to a limited extent - Large numbers of people living in absolute poverty - Reasons for differences between nations (1.4.5) Content-heavy section. Remember two reasons (one global one domestic) in detail and the others vaguely. Global Trade System: Several features of the global trade system work to reinforce inequalities - Protectionism in the agricultural sector, particularly in wealthy countries - Regional trading blocs (cause trade diversion away from developing countries) - Benefits of free trade agreements being inaccessible to developing nations. - If developing countries like Africa, South-America and Asia could increase trade by 1% would lift 128 million out of poverty. - Bilateral agreements favour advanced and emerging economies. Global Finance Architecture: - Long-term flows of investment favour developed countries and short-term favour emerging economies (can be volatile though) - International tax havens - IMF structural adjustment policies favour and serve interests of rich countries - World’s 48 poorest countries received just 4.3% of global FDI 18 - Developing countries have huge foreign debt burdens. World Bank/IMF provide ‘debt relief’ to HIPCS (heavily indebted poor countries) Global aid and assistance: - 58% shortfall of promised vs. delivered aid since 1970 - Phantom Aid - aid that does not improve lives of poor - 1 in 6 dollars is technical cooperation, further 11% is debt and 5% is administration - Aid spending reflects military interests rather than the needs of the poorer countries Domestic factors: some developing nations suffer a self-perpetuating set of circumstances that make it difficult for a country to leave poverty. Natural Resource endowment: - Economies with larger quantities of natural resources such as oil and precious minerals generate higher export income, which can fund education and health. Labour supply and quality: - Differences in education quality and standards and skills. Institutional factors: - High levels of corruption, which decrease public investment in schools etc. - Political instability - Effects of globalisation (1.4.6) Economic growth and development: - No clear evidence globalisation produced an acceleration of eco growth. - World GDP fallen marginally from 2.9% during 1980s to 2.8% per year from 2000-2017 - BUT most countries experienced improvements in development. - Impacted emerging economies the most Income inequality: - Global mobility of skilled labour has increased income inequality. - Lower tariffs can improve standards of living for the poor by reducing prices of goods. - Income inequality has risen by almost 0.45% per year over the past three decades. - Major reason is the impact of technological change. - Trade, investment and transnational corporations (1.4.7) SIGNIFICANTLY INCREASED TRADE FLOWS AND FDI. TNCs accounted for over one quarter of GWP in 2017 International trade in g/s accounts for two thirds of global output. - Vertical specialisation: feature of trade growth where goods are produced in different stages in different economies. (Since late 2000s two thirds of global trade is intermediate goods). - Between 1990 and 2001 FDI increased sevenfold due to deregulation - Environmental sustainability (1.4.8) Negative environmental consequences. 19 - Increased trade sees increase in use of non-renewable fuels for transport - Low income countries desperate for foreign investment engage in economic behaviour that harms the environment. - BUT there are also international institutions and conventions to help enviro (Kyoto) - The international business cycle (1.4.9) Closer economic integration makes economies more exposed to downturns in the international business cycle. Positive impacts of global financial markets include: - Ability to conduct international transactions - Easier to access loans or attract investors - Efficient international financial markets fosters economic development Negative impacts of global financial markets: - Markets shift massive volumes of money causing volatility and collapse exchange rates - In 2000s financial markets played a part in worst economic crisis since Great Depression Case Study Undertake a case study of the influence of globalisation on an economy other than Australia, including an evaluation of the strategies used to promote economic growth and development in this economy. CHINA (Largest economy) Stats History 1978 introduced ‘Open-Door’ policy beginning the SEZs that attracted TNCs and FDI because the tax rate was 15% rather than 33%, low labour costs (5% of US wages) and low import duties. - FDI rose US0.25bn (1978) to US71bn (2019) - Open-Door accounted for 45% of FDI - 1993 International Trade and Investment report stated “in the 1980s contribution to EG came mainly from foreign investment” Economic Growth Average 9.5% annually was January 2020 China recorded negative growth rates for first time -6.8% Economic Development HDI = 0.758 in 2019 (85th worldwide) improved from 0.500 in 1990 Wages: increased by 6% p.a. Every year since 1995 > US$770 in 1995 now US$12680 in 2020 - TNCs created 335 million new kobs - 2013 Rise of the South Report estimated EG achieved as a result of trade and financial strategies helped raise 800 million out of poverty Enviro “War for blue skies” (2018) strategy renovate outdated factories Education: 20 The Compulsory Education Development Memorandum (2017), focuses on critical thinking and innovation, which are crucial skills stated under the Oxford Economics Report. It purports that China must employ innovation to boost productivity and sustain its previous high levels of EG. In January 2020 China recorded negative growth rates for the first time, shrinking 6.8% due to the Covid-19 pandemic. However, in April 2020, China still managed to record a trade surplus of $45.34bn, which can be attributed to manufacturing industries refocusing on producing medical supplies. This feat could only have been achieved through an innovative and skilled workforce demonstrating that education strategies have not only benefited China’s ED but also its growth. Trade Goods: Successful due to cheap prices and high volumes - 38% of GDP in 2018 - Trade doubled in first 10 years of Open-Door - Foxconn stated their parts would cost double if they were produced in the US rather than China. BOGS trade surplus of $45.34bn in April 2020 (slightly less than 2019) However, China is export-led (they need to transition away from this) - Too strong a reliance on trade revenue - Highlighted during US-China Trade War US accounting for 16.2% of China’s exports placed tariffs on hundreds of billions worth of goods dropping EG to a pre-Covid low of 6% in 2019 Multilateral and bilateral agreements are valuable (WTO) in 2001 China has 44 FTAs. Services: Records trade deficits highlighting need for reform 2017 trade deficit of US$290bn (services) Imports mostly skilled services like education (Australia) - To boost services China focused on education reforms. Financial Flows Direct: (more than 10% otherwise known as FDI) - Open-Door policy improved FDI - China receives huge financial inflows but wants to increase its financial outflows to balance reliance on inbound FDI. - Financial outflows = 0.5% of GDP between 2000-2015 - China has relaxed restriction on private firms investing abroad - SOEs (state-owned enterprises) compromised 94% of outbound FDI in 2002 but strategies like “Made in China 2025” (2015) helped this drop to 50% in 2018. - Belt and Road Initiative (2013) - Largest global infrastructure project 21 HSC TOPIC TWO: Australia’s Place in the Global Economy Students learn to: Examine economic issues - Assess the impact of recent changes in the global economy on Australia’s trade and financial flows - Examine the effects of changes in trade and financial flows on Australia’s economic performance - Analyse the effects of changes in the value of the Australian dollar on the Australian economy - Discuss the impact of free trade and protection policies on the quality of life in Australia - Propose likely changes to the structure of industry within Australia as a result of current trends in the global economy Apply economic skills - Calculate the main components of Australia’s balance of payments - Analyse the relationship between the balance of the capital and financial account and the net income balance - Explain the relationship between the current account balance and the balance of the capital and financial account - Use supply and demand diagrams to explain how the value of a currency is determined under different exchange rate systems - Analyse the impact of changes in the components of the balance of payments on the value of the Australian dollar Content: Australia’s trade and financial flows (2.1) - Costs China US$150bn per year to link 68 countries - Boosts China’s net primary income earned on FDI Portfolio: (less than 10% can be loans or financial market) - 1990s deregulation improved financial inflows and outflows - Relaxed laws on banking firms, formed a strong stock market and embraced free-market strategies. - Second largest stock market BUT foreign investors own only 3% of China’s total securities (China owns more of others) - China owns US$4trillion in foreign currency reserves meaning they can control the renminbi against the USD (devaluing)