HSC economics Topic One Notes

These notes have been done on paper → key definitions and deeper explanations will be covered here → for full dot point notes, please check the hand-written pdf copy before. 


The Global economy → The global economy refers to the sum of economic interactions between individual countries, where changes in an economy impact the rest. 


Gross World Product → Gross World Product refers to the value of goods and services produced in the global economy over a period of time, typically one year, and is equal to the value of the sum of all individual economies’ GDP. 


Globalisation → Globalisation refers to the increased integration of individual economies on the basis of labour, investment, finance, trade and technology. 

  • Trade liberalisation refers to the process of reducing barriers to trade and has significantly accentuated the process of globalisation. 

  • Finance refers to the short-term speculative shifts of money

    • Investment refers to the longer-term capital allocations to invest within, purchase or establish businesses. 

    • Foreign Direct Investment is the movement of funds between economies for the purpose of outright purchasing or acquiring significant shares in an existing company, where the stake purchased exceeds or is equal to 10%.

      • Greenfields investment refers to when a company establishes operations in a foreign company from the ground up. 

    • The movement of funds across the globe, especially FDI, has been a crucial derive of globalization as it has enabled the development of Transnational Corporations (TNCs), which coordinate investment and production across multiple countries, linking economies into global value chains. Furthermore, TNCs introduce advanced skills, new tech, and modern methods to developing economies 

    • Portfolio Investment is when the investment is less than 10% of total stake, and is speculative, and the  ownership is focused on financial returns

  • Transport, Technology and Communication improvements have driven globalization by lowering costs, increasing speed and enabling new global business models by facilitating real-time communication, e-commerce and digital financial transactions.  

  • International division of labour → International division labour refers to specialisation where countries focus on different types of work depending on comparative advantage and skills levels. 

    • Brain Drain effect → refers to when skilled workers emigrate from developing or emerging economies to higher-income more advanced economies, depriving source countries of human capital. 

    • Worker’s remittances → refer to payments sent home by migrants working abroad, often forming a significant share of GDP in developing economies. 

IBC and RBC:

  • The Regional Business Cycle refers to the changes in output in a region of economies over time, such as changes in North America. 

  • The International Business cycle refers to the changes in world output or GWP over time. 



Free trade → free trade refers to movement of goods and services between countries without the imposition of artificial barriers to trade.


Comparative advantage → When a country can produce a good at a lower opportunity cost than another country (David Ricardo). Comparative advantage is a key driver of specialisation and serves as the basis of international trade. 


Absolute advantage → When a country can produce more goods with the same amount of resources as another country (Adam Smith) 

  • This relates to overall productivity and efficiency but does not determine trade patterns 



Advantages and Disadvantages of Free Trade:


Advantages 

Disadvantages 

Specialisation/Comparative advantage 

Dumping

Prices decrease 

Infant industry argument 

New goods/services

Employment

Efficient allocation of resources 

Defence 

SPINE

DIED



World Trade Organisation:

  • The WTO is an intergovernmental organization that was established in 1995, and has 166 current member countries. Its main role is to promote multilateral free trade agreements, as well as proving a formal mechanism for resolving trade disputes among member countries 

  • Examples of its effectiveness and ineffectiveness are:

    • Uruguay round → successful

      • The Uruguay round (1986-94) slashed global tariffs on industrial goods by over 40%, as well as integrated banking, intellectual property, and other areas into trade agreements

    • Doha Round → INEFFECITIVE

      • Aimed to reduce agricultural protection, tariffs on industrial goods and help smaller nations 

      • Instead deep divisions between developing and advanced nations led to conflict and failed to create meaningful multilateral free trade agreements 



International Monetary Fund:

  • The IMF, established in 1944 under the Bretton Woods Agreement, has 191 member nations and provides financial assistance in the form of conditional loans to nations experiencing currency collapses or balance of payments crises to maintain financial stability. 

  • These conditional loans come alongside structural adjustment policies which the receiving nations have to implement in order to get access to the financial assistance. 

  • EFFECTIVE:

    • Provided Argentina with US$60bn in 2018 following a currency collapse 

    • Also provided South Korea with US$60bn after the Asian Financial Crises to prevent a currency collapse 

  • HOWEVER, the ineffectiveness of the IMF’s SAPs was demonstrated when these policies led to both nations experiencing deep recessions.


World Bank: 

  • Established in 1944 under the Bretton Woods Agreement, the World Bank has 189 member nations and provides nations conditional loans to support infrastructure and long-term economic development projects, requiring SAPs

    • E.g. 

      • Provided over US$200bn in COVID-19 to fund emergency health responses, purchase and distribute vaccines, protect poor households, and stabilize collapsing national economies.

      • Also provided over $100bn to developing nations in the GFC but the SAPs were ineffective. 


Organisation for Economic Co-operation and development:

  • The OECD, established in 1961 with 38 member countries including Australia, promotes policies that improve economic and social well-being, encouraging free markets and sustainable economic growth among ADVANCED ECONOMIES

  • CONDUCTS POLICY RESEARCH AND DEVELOPMENT

  • Created the Base Erosion and Profit shifting (BEPS) in 2016 to assist global tax avoidance by major TNCs

  • Developed realtime policy frameworks during COVID to advise nations on managing stimulus and supply chain reliance. 


United Nations:

  • Established in 1945, has 193 member nations and facilitates global cooperation in law, security, economic development and social progress. 

    • Halved extreme poverty by spearheading the Sustainable Development Goals from 1.9bn to 840 mil


G20

  • Global forum for 19 major economies (Australia, UK,UK,Germany, France)  and the EU 

  • Represents 85% of global GDP and 75% of trade

  • Replaced G8 as main forum after GFC



G7

  • Forum of 7 advanced economies (US, UK, Germany, France, Japan, Italy, Canada) plus the EU as a non-enumerated participant

  • Represents around 45% of global GDP but only about 10% of world population

  • Was the G8 from 1997 until Russia was suspended in 2014 following the annexation of Crimea

  • Focus is macroeconomic policy coordination, currency stability and development aid among advanced economies

  • Superseded by the G20 as the main global forum after the GFC, since it excluded China, India and other emerging economies driving global growth


Trading Blocs refer to formal agreements between countries within a geographic nation to reduce or eliminate trade barriers among member nations. Examples are the USMCA, ASEAN and the Eurozone 


Bilateral FTA’s +-

  • Bilateral free trade agreements refer to reductions in protection solely between 2 nations. Examples include ChAFTA, ANZ-CERTA, AUSFTA and so on. 

  • Conversely multilateral FTA’s refer to reductions in protection between 3 or more nations. Examples include CPTPP and RCEP


ADVANTAGES

DISADVANTAGES

Faster and easier to negotiate as compared to multilateral free trade agreements

Trade diversion may occur, shifting trade away from more efficient non-members. 

Terms can be tailored to the specific needs of the two member nations

Can undermine the multilateral trading system as set up of the WTO and can fragment global trade rules 

Strengthens bilateral diplomatic and economic ties  

Excluded countries may retaliate through increased protection or may even form rival trading blocs

A weaker or smaller economy may have less bargaining power in a bilateral FTA as compared to the larger, more advanced economy and thus can lead to an unequal deal.



Multilateral FTA’s +-

  • Conversely multilateral FTA’s refer to reductions in protection between 3 or more nations. Examples include CPTPP and RCEP


ADVANTAGES

DISADVANTAGES

Greater trade liberalization across multiple countries, thus maximizing gains from trade for member nations 

Negotiations are slow and complex and thus may take a substantial amount of time due to the number of countries involved

Reduced trade diversion as tariffs are lowered for all members not just an individual partner. 

Reaching a consensus or agreement upon terms is difficult due to competing interests (e.g. developing nations vs advanced economies)

Non-discriminatory (most favored nation principle), which promotes a more efficient global allocation of resources 

Weaker or smaller economies may be pressured into unfavourable terms that unproportionately  favor larger economies 

Strengthens the multilateral trading system and global economic cooperation 

Less tailored to individual country needs compared to bilateral deals.