Economics HSC Topic 1 – The Global EconomyInternational economic integration The global economy - the economy, which is based on economies of all of the worlds countries, national economies. Gross World Product -refers to the sum of total output of goods and services by all economies in the world over a period of time. Globalisation – the process of increased integration between different countries and economies and the increased impact of international influences on all aspects of life. The key indicators of integration between economies include: - International trade flows: Has grown rapidly in recent years. GWP is now 8 times larger than in 1950 but world trade is 28 times larger. Much of this rapid increase can be attribute to the influence of TNCs, global companies which dominate the global product and factor markets. TNCs often structure production so that different stages of the production process occur in different economies, depending on cost. - Financial flows:Globalisation of finance has played a major role in linking economies around the world. The most “globalised” feature of the world economy because money can move quickly between countries compared to goods and services. Technology has helped link the global financial market. The main drivers of global financial flows are speculators who buy or sell financial assets with the aim of making profits in the short term. (Criticised for creating volatility). - International investment: Since the 1970s, massive growth in investment between countries. The expansion of foreign direct investment between counties (movement of funds between countries for the purpose of buying companies, firms or a large proportion of shares in a company) has contributed to the globalisation of investment. FDI flows are mainly concentrated in developed countries from the Organisation from Economic Cooperation and development (OECD), but are becoming increasingly integrated to other economies. - Technology, transport and communication: New developments in these areas have directly resulted in the expansion of trade and investment. Internet can reduce business costs such as communication costs that were once barrier to integration between countries. Developments in freight technology, more reliable cargo vessels and high speed transport have seen expansion in world trade. Businesses corporations which develop new technologies also often expand directly into OS markets to sell their products to global consumers, also increasing investment. - International division of labour and migration: Although much less internationalised then other measures of globalisation, people are moving overseas to take advantage of better working conditions then their own country more than ever before. These movements are concentrated amongst the top (highly skilled) and bottom (unskilled) of the labour market. Globalisation of
labour mostly seen though shift of production of businesses between economies in search of the most efficient and cost effective labour, rather than the movement of people. The international business cycle – The fluctuation in world economic growth is known as the “International Business Cycle”. Form most countries, economic growth is stronger when the rest of the world is growing and strongly and weaker when other countries are experiencing a downturn in economic growth. Increased integration of economics systems has made this situation more apparent and the economics conditions in one country often have a significant impact on the economic conditions of another country. Factors That Strengthen the Factors that Weaken the International Business Cycle International Business Cycle Trade Flows Domestic Interest Rates Investment flows Government Fiscal Policies Transnational Corporations Other Domestic Economic Policies Financial Flows Exchange Rates Technology Structural Factors Global Interest Rates Regional Factors International OrganisationsTrade, financial flows and foreign investmentDefinitionsFree Trade – a situation where there are no artificial barriers to trade imposed by governments forthe purpose of protecting domestic consumers from foreign competition.Comparative advantage – the idea that nations should specialise in the areas of production in whichthey have the lowest opportunity cost and then trade with other nations.Opportunity cost – the cost of satisfying one want over an alternative want.
The basis of free trade – One of the most fundamental assumptions of economists is thatfree trade is a good thing and that free trade will achieve the fastest rates of growth for aneconomy. Although barriers remain, recent years have seen much progress towards freetrade.The argument for free trade is based on the principle of comparative advantage.Advantages of free trade: - Allows countries to obtain G&S that they cannot produce themselves. - Allows specialisation which drives efficiency - Encourages efficient allocation of resources - Leads to economies of scale - Encourages businesses to become internationally competitive - Encourages innovation - Leads to higher living standards through lower prices.Disadvantages of free trade: -An increase in short term unemployment as businesses find it hard to compete with foreign businesses -New industries find it hard to establish themselves -Dumping of protection surpluses (international companies selling excess stock on the domestic market at unrealistic levels).Role of international organisations: -World Trade Organisation: A global organisation that enforces the existing WTO agreement, resolves trade disputes and is the major forum for Global trade negotiations pursuing the goal of global free trade. - International Monetary Fund: A global organisation whose main role is to maintain international financial stability. The IMF plays a key role in monitoring the international financial system and assisting economies who face major economic crises. -World Bank:The World Bank is a global organisation whose main role is to assist poorer nations with economic development through loans, development assistance and technical advice. Their current primary aim is to halve poverty levels by 2015. Another important action has been the Heavily Indebted Poor Countries Initiative, which aims to reduce debt by 66% in 46 of the World’s poorest nations. -United Nations: Its agenda covers the global economy, international security, the environment, poverty and development, international law and global health issues. Plays an important role in supporting greater linkages between economies and promoting globalisation. -Organisation for Economic Co-operation and Development: Committed to democracy and to the marker economy. The primary goal of the OECD is to promote policies “to achieve the highest sustainable economic growth and employment and a rising standard of living in member countries, while maintaining fiscal stability, and thus contribute to the development of the world economy.
Influence of government economies forums -G20:In the aftermath of the global financial crises, the G20 emerged as the leading council of nations responsible for the management of the global economy. Includes world’s largest national economies and the G8. Promotes open and constructive discussion between industrial and emerging-market countries on key issues related to global economic stability. -G8: Largest industrialized nations, operated as the economic council of the world’s wealthiest nations. Agenda often included general political issues and current priorities such as climate change, global poverty and security. Trading bloc, monetary unions and free trade agreements : -Trading bloc: occurs when a number of countries join together in a formalpreferential trading agreement to the exclusion of other countries - Free trade agreements: formal agreements between countries designed to break down protection barriers.Global Agreements -World Trade Organisation (WTO)Regional Agreements -European Union (EU) -North American Free Trade Agreement (NAFTA) -Asia Pacific Economic Forum (APEC) -Association of South East Asian Nations (ASEAN)Bilateral Agreements -CERTA/ANZCERTA—Australia and New Zealand -SAFTA—Australia and Singapore -AUSFTA—Australia and United StatesProtection Reasons for protection: Protection is any policy which gives domestic producers an advantage over foreign producers. Despite economic arguments for free trade, most nations have historically tended to implement at least some protectionist policies. -Infant industries:New industries tend to face great difficulties and higher costs in their early years. As such, it is argued that these ‘infant industries’ need protection in the short term so that they can reach economies of scale and reduce their costs of production in order to be competitive internationally. This argument is only valid if the protection is short term. Historically, however, it has tended to remain in place well beyond this initial time period. -Prevention of Dumping:Dumping may be used either to dispose of large production surplus’ or to establish a market foothold in another country. The low prices it creates are of a temporary nature only but are capable of harming domestic producers. Local firms that could normally compete are forced out of business, damaging a country’s productive capacity and causing unemployment to rise. Prevention of dumping is the only argument for protectionism accepted widely by economists.
Protection Of Domestic Employment: One of the most popular arguments for protectionism is that it keeps domestic employment high, as there are minimal foreign goods so demand for domestic goods remains high. However, this argument overlooks that protectionism leads to an allocation of resources away from efficient industries and towards less efficient production. In the long term, this will most likely lead to higher levels of unemployment and lower rates of economic growth. By phasing out protection, it is hoped that better and more lasting jobs will be created within sections of the economy that are more competitive internationally. Methods of protection and the effect of the protectionist policies on the domestic and global economy: 1) Tarrifs: A tariff is a government-imposed tax on imports. It effectively raises the price of the imported good for the consumer, making the domestic good more competitive.Economic effects of a Tariff -Domestic producers supply a greater quantity of a good. Thus the tariff stimulates domestic production and employment. -More domestic resources are attracted to the protected industry. This leads to a reallocation of resources towards less efficient producers and industries. -Consumers pay a higher price and receive fewer goods. This redistributes income away from consumers to domestic producers. -The tariff raises revenue for the Government; however, this is not its primary objective. -A retaliation effect, in which other countries place tariffs on the nation’s more efficient export goods, may be experienced. In fact, this loss would be even greater, as the inefficient import-competing goods would be encouraged while the more efficient export industries would be discouraged. 2) Subsidies:Subsidies are financial assistance to domestic producers, enabling them to reduce their selling price and compete more easily with imported goods. Businesses are able to sell a higher quantity of the product at a lower price on both domestic and global markets. While economists are generally opposed to subsidies, they prefer them over tariffs because subsidies are expenditure by the Government rather than revenue and, as such, are more likely to be reviewed regularly and removed when necessary. Also Subsidies tend to reduce prices, thus lowering inflation and benefiting consumers.
Economic effects of a Subsidy: -Domestic producers supply a greater quantity of a good. Thus the tariff stimulates domestic production and employment. -More domestic resources are attracted to the protected industry. This leads to a reallocation of resources towards less efficient producers and industries. -Consumers pay a lower price and receive more goods, because subsidy shifts the supply curve to the right. However, consumers still pay indirectly for subsidies through higher taxes. - Subsidies impose direct costs on government budgets because they involve payments from the government to the producers, less resources for other priorities. 3) Quota: An import quota is a limit on the amount of a good that may be imported over a given period of time. This guarantees domestic producers a market share. It works in much the same way as a tariff, but only raises revenue if Import licenses are sold.Economic effects of a Quota: -Domestic producers supply a greater quantity of a good. Thus the tariff stimulates domestic production and employment. -More domestic resources are attracted to the protected industry. This leads to a reallocation of resources towards less efficient producers and industries. -Consumers pay a higher price and receive fewer goods. This redistributes income away from consumers to domestic producers. -Much like a tariff, quota can have a retaliation response from the country whose exports may be reduced because of the quota.
4) Local content rules: stipulate that products must contain a certain percentage of locally made parts 5) Export incentive programs: give domestic producers assistance in the form of grants, loans or technical advice to help business’ expand into global markets.Globalisation and economic development Differences in economic growth and developmentDefinitionsEconomic growth: Sustained increased in a country’s productive capacity over time. Usuallymeasured by the percentage change in real Gross Domestic Product.Gross National Income (GNI): is the sum of value added by all resident producers in an economyplus receipts of primary income from foreign sources.Economic development: A broad measurement of welfare in a nation that includes indicators ofhealth, education and environmental quality as well as material living standards.Note: Even though Economic Growth and GNI are sometimes used to make an approximation aboutEconomic Development- this can give misleading results and often not an appropriate measure ofdevelopment at all.Human Development Index (HDI)As a measure of Economic development, HDI takes into account: -Life expectancy at birth -Levels of Educational Attainment -GDP per capita.The HDI index gives a score between 1 and 0, with 0 being no economic development.Comparing HDI and GDP statistics reveals the differences between growth and development acrossthe Globe. These include: -Some countries with similar HDI levels have very different income (GDP) levels. This suggests that in some countries income is not well distributed due to the inequalities. -Some countries have vastly differing HDI and GDP rankings. Cuba and Myanmar (Burma) both have a HDI 30 places above their GDP rank, while South Africa and Botswana both have a HDI level 70 places below their GDP rank.In making these comparisons, however, it is important to remember that economic growth is stillcrucial for high levels of development.Other Measures of Economic Development include: -The Genuine Progress Indicator provides a measure of long term stability. -The Happy Planet Index, provides and indication of how successfully economies are able to balance the twin goals of humans development and environmental sustainability.
Distribution of income and wealth:In general, developing countries are experiencingfastereconomic growth rates than higher income countries and over time this could see incomelevels coverage and inequalities narrow. Increased openness to trade raises incomes forworkers in developing countries and lower protection means lower prices. Hence the moreopen global economy of recent decades has reduced inequality. On the other hand,increased financial flows provide greater employment opportunities and fuel economicsgrowth, but FDI flows tend to be concentrated in higher skill and higher technology sectors,thus increasing inequality.Income and quality of life indicators: -Inflation -Adult literacy rate -Foreign Aid -EnergyConsumption -Domestic savings -Primary Education -Life expectancy -Doctors per 100,000 people -Fertility RateCategories of development: -Developing economies: A non-industrialised or “poor” country that may be seeking to develop its resources through a process of industrialization. These countries may have only achieved very limited progress in this area. -Advanced economies:countries that have a high level of development according to a set of comparison criteria. Which criteria and which countries are classified as being developed, is a contentious issue and is surrounded by fierce debate. Economic criteria have tended to dominate discussions although quality of life indicators are also important. -Emerging economies:rapidly growing and volatile economies of certain Asian and Latin American countries. They promise huge potential for growth but also pose significant political, monetary, and social risks.Causes of inequality between nationsGlobal Factors -Global Trade System: Wealthy nations protect their domestic Agricultureindustries as they are not competitive with developing nations. Developing nations whichare agricultural exporters are highly affected by this.Expanding regional trade blocs excludepoorer nations from lucrative consumer markets.The benefits of free trade agreements areoften inaccessible to developing nations because of the substantial cost in implementinginternational agreements and lodging appeals against other nation’s protectionist policies.
-Global Financial Architecture: Long-term international flows of investment heavilyfavour developed countries.Short-term inflows heavily favour ‘emerging markets’ of thedeveloping world and can cause domestic economic volatility that can set economicdevelopment back decades. The IMF faces a major criticism in that its ‘structural adjustment’policies serve the interest of rich nations, and may not be appropriate to the conditions ofdeveloping economies.As a result of greater access to foreign financial markets, manydeveloping countries have massive foreign debt burdens. -Global Aid and Assistance:The total annual development aid provided by richnations is relatively small—0.26% of GWP.It is argued that significant proportions of officialdevelopment assistance is ‘phantom aid’—aid funds which do not go to improving the livesof the poor. It is estimated that only 30% of aid is ‘real aid’.The distribution of aid by high-income economies often reflects political and military considerations rather than going tothe poorest nations. -Global Technology Flows: Modern technology is largely geared to the needs of highincome countries, rather than the needs of developing countries. Much of this technologyhas limited use in Developing nations. Developing nations also find it difficult to gain accessto new technology, due largely to intellectual property rights.Domestic Factors -Economic resources: Economies with cheap and abundant supplies of Naturalresources have a better chance of economic development. Developing nations tend to highpopulation growth, poor education levels and low health standards, all of which lead tolower quality labour. Difficulty in gaining access to capital for investment and development isanother major structural weakness of developing nations. Low levels of savings from lowlevels of income create a cycle of low levels of investment and slow expansion. The cultureof a nation in regards to individual responsibility, enterprise, wealth creation and work ethiccan affect the capability of that nation to produce entrepreneurs. -Institutional Factors: Political instability, corruption and lack of law enforcementcan undermine the confidence of investors in an economy, with conditions such as thisgiving inadequate foundation for solving disputes. Government policy relating to tradeflows, investment flows, TNCs and participation in regional and global economic agreementscan all affect a developing nation’s ability to take advantage of the benefits of globalisationand integration, such as access to foreign capital, economic restructuring and efficiency.Effects of Globalisation:1) Economics Growth: advanced economies and emerging economies have generally been the winners. Fast growth and increased trade and investment. Some regions have not benefited from globalisation and have been pushed further down. CONVERGENCE was expected but the result has actually been DIVERGENCE2) Trade, investment and transnational corporations: Globalisation has resulted in substantial increases in the size of trade flows and foreign direct investment. TNC’s have also gained a much more influential role in the global economy and this in itself has increased trade flows and investment flows.
3) Inequality: The relationship between globalisation and global inequality is one of the most debated topics in economics at the moment. It remains unclear whether globalisation has led to more or less inequality overall.In general terms, Asia has experienced some catch up against the GDP of the developed world while GDP per capital in others including Latin America and eastern Europe have fallen to a quarter of the developed world. Africa is even worse.4) Environmental stability: Globalisation can have negative environmental consequences. Countries which are desperate for growth will seek it at all environmental degradation.On the other hand- globalisation has increased international awareness of environmental issues.5) International business cycle: Closer economic integration can make countries more exposed to downturns in the international business cycle. This is a negative effect of globalisation.