Economics global


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Economics global

  1. 1. Trade in the Global Economy
  2. 2. Free trade Defined as a situation where there are: “ no artificial barriers to trade imposed by governments for the purpose of shielding domestic producers from foreign competitors”
  3. 3. Globalisation “ (Economic) globalisation is the growing interdependence and integration of countries worldwide through increasing volume and variety of cross-border transactions in goods and services, free movement of international capital flows, and more rapid and widespread diffusion of technology”.
  4. 4. Free trade Economists assume trade is beneficial and that free trade is the best way to foster trade Although there are still many barriers to trade, often unofficial, in recent years there has been a decline in official barriers and progress in free trade
  5. 5. Free trade based on theory of comparative advantage The argument for free trade is based on the concept of “Comparative Advantage” The principle is that nations should specialise in the production in which they have the lowest opportunity cost ie the real cost), to maximise their standard of living Eg if the cost of producing wine is lower in Australia than in the US, then we have a comparative advantage in wine production. The US may have a comparative advantage in the production of electronic goods or some other manufactured item.
  6. 6. Free trade based on theory of comparative advantage Absolute advantage
  7. 7. Free trade based on theory of comparative advantage Comparative advantage
  8. 8. What can cause the comparative advantage to change?
  9. 9. Free trade based on theory of comparative advantage Advantages of Free Trade Trade allows G and S which cannot be produced in one country to be available to all Free trade allows countries to specialise in production in which they are most efficient Free trade encourages the efficient allocation of resources Specialisation leads to economies of scale Free trade encourages innovation and new technology Disadvantages of Free Trade Domestic businesses may find it hard to compete with imports - therefore unemployment New industries may find it hard to “ start up” without protection Production surpluses from a country may be dumped on another, leading to distortion of market
  10. 10. Recent cases and issues De regulation of book industry. Good idea? We continue to subsidise the car industry in Australia. Why? Weapons development? We specialise in education exports. What are the risks? What are the impacts of free trade in education?
  11. 11. Recent cases and issues Parent interview: Do you want to eat Australian meat and fish? Why? European and US food production is heavily protected. Why? Do we need to protect any cultural elements of our society? How would the development of the internet have affected comparative advantage for small firms? Who are the winners, who are the losers from free trade? Pedro
  12. 12. International Organisations World Trade Organisation (WTO) Formed 1995 to implement and advance global trade agreements Current round of negotiations (Doha) which aims to abolish agricultural export subsidies by 2013 - currently stalled  preferential agt focus International Monetary Fund (IMF) Role to maintain international financial security, particularly in relation to forex market World Bank Role to help poorer countries with their economic development, esp reducing global poverty by 2015 Other G8 group of 8 largest industrialised countries G20 now taking over United Nations - overseas several agencies that have a focus on developing countries
  13. 13. International Organisations Why do we need them? Task: Expand on these words to develop reasons: Avoid financial instability, collapse Crisis assistance Resource security- water …. Environmental protection –how Dispute resolution- trade
  14. 14. United Nations 192 member nations (WTO has 139 member nations) Est 1945 30 affiliated organisations known as the UN system Is funded by member nations Does not make laws
  15. 15. Who pays?
  16. 16. The UN family
  17. 17. There are more UN organisations than these too
  18. 18. Functions Maintain international peace and security Develop friendly relations among nations Cooperate in solving international problems and promote human rights Be a centre for harmonising the actions of nations
  19. 19. United Nations
  20. 20. UNCTAD United Nations Conference on Trade and Development ideas Is a UN organisation established in 1964 3 roles: Forum for consensus based intergovernmental discussions on sustainable development Research agency Technical assistance to developing nations Focused on unfair and asymmetric international economic relations Need for international policies and rules to address these asymmetries: Special and differential treatment (trade preferences, exceptions, longer periods of adjustment…) Positive agenda in trade negotiations No one size fits all
  21. 21. Millennium Development Goals Eradicate extreme poverty and hunger Achieve universal primary education Promote gender equality and empower women Reduce child mortality Improve maternal health Combat HIV/AIDS, malaria and other deceases Ensure environmental sustainability Develop a Global partnership for Development
  22. 22. Millennium Development Goals Push forward world trade talks to reduce agricultural protectionism (WTO) Finance debt relief properly (WB) Step-up delivery of the ”education for all” targets (WB) Make available substantial extra resources for TB, malaria and HIV/AIDS to eliminate preventable diseases (WB)
  23. 23. Strengths of UN Contributions Promotes human rights for all Provides an international framework for national development policies Sets global goals Provides data about global issues and trends Has a good understanding of region and country perspectives Has changed debate about trade and development Proposes development policies that combine economic growth with poverty reduction Brings issues of environment and development to global attention, especially global warming
  24. 24. A Summary of the UN’s Contributions(*) Promotes preventive diplomacy & human security Promotes the human development approach – a good framework The balance sheet shows a small surplus The UN has led the way with many fundamental ideas, more than is often realized The UN has often been ahead of the World Bank and the IMF – though these have received most donor support and most finance Ideas may be among the UN’s most important contributions
  25. 25. Some criticisms Weak response to the special needs of the least developed countries Too little done to introduce cultural aspects into the development equation Tardy and weak reaction to HIV/AIDS Inadequate attention inequalities of income and wealth, nationally & internationally
  26. 26. Intellectual Challenges for UN Growing divide between the Islamic world the West Measures of human security New measures to support the LDCs and countries in transition Cultural aspects in the development equation Responding to the long-run challenges of environment and sustainability Global economic inequalities – the gap is growing Mechanisms to ensure genuine international competition and free markets are fostered
  27. 27. UN Economic Ideas Have Often Differed from the World Bank’s and the IMF’s(*) Fairer international economic relations National development strategies Development goals Social development
  29. 29. World Trade Organisation Established 1995 Created by Uruguay Round of GATT negotiations (1986-94) 153 countries – members Goal: to help trade flow smoothly and freely without barriers, to resolve trade disputes between economies Multilateral agreements set ground rules for international commerce – have been effective in getting compliance since Uruguay round of GATT in 1993 formed the WTO with enforcement powers.
  30. 30. Uruguay round Reduced protection for agricultural products Global trade agreements extended to insurance and banking, and intellectual property- important as services fastest growing area
  31. 31. World Trade Organisation Responsible for; Administering WTO trade agreements Forum for trade organisations Handling trade disputes by consensus Monitoring national trade policies Technical assistance and training for LDCs Cooperation with other international organisations Latest round: Doha October 2010
  32. 32. World Trade Organisation Successful in: Dispute resolution – (if countries do not comply with decision, then trade sanctions may be applied on goods from the offending nation) Between smaller countries Not between EU and US DOHA round bogged down over reductions in agricultural protection. India and Brazil, producers of manufactured goods and services, will not open up unless they get access to US, EU agricultural markets
  33. 33. WTO cont Also criticised for: Time consuming and complex negotiation of multilateral agreements – leading to more bilateral agreements Falling share of world trade taken by developing countries A legitimate criticism of the WTO may be that it has helped to construct the world trade system that is ”complicated, cumbersome and rigid”. Source: Dr D Sala, Bank of Finland 2006
  34. 34. World Trade Organisation Main rules of WTO re trade: Non-discrimination Reciprocity General prohibition of quotas Fair competition Binding tariff reductions Task: Visit WTO website: what has been achieved recently? Outline the key features of one dispute in which the WTO has been involved.
  35. 35. STRENGTHS AND WEAKNESSES WTO Binding trade law Powerful “judicial” mechanism BUT Increasing complexities of multilateral negotiations Increasing regional and bilateral trade agreements UNCTAD Wants to build trust and credibility among developing countries Independent research BUT Only a political role (no “teeth”) Limited human and financial resources
  36. 36. THE MANDATE UNCTAD: Integrated treatment of trade, investment and related issues = wide mandate Research on trade and development issues Consensus-building through intergovernmental machinery Technical cooperation on all the topics of UNCTAD work WTO Rules-based organisation, negotiates binding multilateral trade law (“legislative” role) Dispute settlement mechanism with mandatory decisions, can apply sanctions (“judicial” role) Mandate confined to the existing trade agreements and to the scope of the negotiations
  37. 37. INTERNATIONAL MONETARY FUND (IMF) Founded 1945, Washington DC 184 member countries Set up to maintain stability of international monetary and financial system Three main functions: surveillance, technical assistance, lending Monetary institute, whose resources ($) are provided by its member countries, primarily through payment of quotas which broadly reflect each country’s economic size. These are also reflected in the size of their voting power.
  38. 38. INTERNATIONAL MONETARY FUND (IMF) Encourages countries to adopt sound economic policies through surveillance- regular reports on country progress like OECD reports. Recommendations made Provides technical assistance and training in several areas: fiscal policy, monetary and exchange rate policies, banking, financial system supervision and regulation, statistics Source of assistance when a country is in difficulty - rescue packages
  40. 40. Criticisms of IMF Only lends money if countries agree to Structural Adjustment Packages: Correct economic policies- most often balance of payments issues sell their resources cheaply eg cash crops for export cut public spending – often health and education major victims remove subsidies Many overseas lenders and investors will only lend if IMF rules followed Often causes poverty to increase through tough conditions for loans, eg during Asian crisis in Indonesial 1998
  41. 41. World Bank Founded 1945, Washington DC Goal: economic development: global poverty and improvement of living standards Source of financial and technical advice to developing countries Not a real bank but does provide low interest loans, interest free credit and grants for education, health, infrastructure etc. Promotes development through advice and financial assistance – loans Countries encouraged to lift import and export barriers, cut subsidies and remove price controls Key role in Millenium Development Goals including “ develop a global partnership for development”
  42. 42. World Bank Founded 1945, Washington DC Goal: economic development: global poverty and improvement of living standards Source of financial and technical advice to developing countries Not a real bank but does provide low interest loans, interest free credit and grants for education, health, infrastructure etc. Promotes development through advice and financial assistance – loans Countries encouraged to lift import and export barriers, cut subsidies and remove price controls Key role in Millenium Development Goals including “ develop a global partnership for development”
  43. 43. World Bank - criticisms Loans often depend on countries following a strict “ Structural Adjustment Program” eg removal of protection Leads to rapid increase in price of goods of countries and greater poverty Leads to lower investment and cuts in social spending eg education Little evidence of success Most recent initiative: Heavily Indebted Poor Countries Initiative – aim to reduce debt by 2/3 in 46 of world’s poorest countries by 2015
  44. 44. Reply to criticisms Poor countries suffer most from failure to integrate into the global economy Support is needed to assist them integrate Multilateral consensus agreements are the best strategy available UN, IMF, WTO, World Bank are still the best options to achieve this. Task: What are the Millenium goals for economic development?
  45. 45. OECD Established 1961 Based in Paris, France 33 countries members Our mission OECD brings together the governments of countries committed to democracy and the market economy from around the world to:      Support sustainable economic growth Boost employment Raise living standards Maintain financial stability Assist other countries' economic development Contribute to growth in world trade The Organisation provides a setting where governments compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies.
  46. 46. OECD Monitoring, analysing and forecasting OECD is one of the world's largest and most reliable sources of comparable statistics and economic and social data. OECD monitors trends, analyses and forecasts of economic developments and researches social changes or evolving patterns in trade, environment, agriculture, technology, taxation and more.  Shares expertise and exchanges views with more than 100 other countries Provides opportunities for governments to compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies.
  47. 47. International Organisations Tasks 1. Consult a parent or adult for a comment. Ask them which of these organisations they think is most important and why. 2. Organisation research: Use your text and online resources: Justify the role of the UN. Select two of the international organisations listed and evaluate their importance as global organisations Visit the World Bank and find three projects it has undertaken recently. Prepare a brief summary. Has the WTO been a success or a failure? Justify your answer, in depth. Visit the site before you make your decision. Visit the IMF, follow the links to Country info. Have a look at what is said about Australia. Follow the links to Member voting rights. Analyse the table and summarise your findings.
  48. 48. International Organisations Tasks Visit the IMF. Outline what is needed to get a scholarship from the IMF. Visit the OECD website and watch the video. State the main points made about the OECD. Identify four jobs which look interesting. 7. Investigate criticisms of the OECD on the web. Summarise three major comments.
  49. 49. Influence of government economic forums G7/8 G20 World Economic Forum
  50. 50. Influence of government economic forums
  51. 51. Purpose of G7/G8 The Group of Eight (G-8) is a forum for the leaders of eight of the world’s most industrialized nations, aimed at finding common ground on key topics and solutions to global issues. The G-8 includes Canada, France, Germany, Italy, Japan, Russia, the United Kingdom and the United States. While the leaders of these countries are in regular contact, they meet in summit format as the G-8 once a year.
  52. 52. Purpose of G7/8 Muskoka Canada 2010 G-8 Summit Concludes 26 June 2010 Prime Minister Stephen Harper today made the following remarks on the closing of the G-8 Summit: “ We had a very successful summit.  We have refocused the G-8 on its strengths: development, peace and of course global security challenges.  The G-8 has committed an additional $5 billion US over the next five years, and with our partners bringing the total to $7.3 billion on the Muskoka Initiative on Maternal, Newborn and Child Health.  “ We also discussed a further range of global challenges, nuclear proliferation, Iran, the implementation of sanctions foreseen by resolution, United Nations resolution 1929, also North Korea and the Cheonan incident.  The governments of Iran and North Korea have chosen to acquire weapons to threaten their neighbours.  The world must see to it that what they spend on these weapons will not be the only cost that they incur.  We’ve also discussed Afghanistan, Pakistan, governance, stability in that particular region, of course the Middle East and climate change.  It is essential that the G-8 keep its promises going forward.  This is essential to the credibility and effectiveness of this forum as an organization.
  53. 53. Purpose of G20 The Republic of Korea is honored to chair the Group of Twenty in 2010. The G20 was established in 1999, in the wake of the 1997 Asian Financial Crisis, to bring together major advanced and emerging economies to stabilize the global financial market. Since its inception, the G20 has held annual Finance Ministers and Central Bank Governors' Meetings and discussed measures to promote the financial stability of the world and to achieve a sustainable economic growth and development. To tackle the financial and economic crisis that spread across the globe in 2008, the G20 members were called upon to further strengthen international cooperation. Accordingly, the G20 Summits have been held in Washington in 2008, and in London and Pittsburgh in 2009.
  54. 54. Purpose of G20 The concerted and decisive actions of the G20, with its balanced membership of developed and developing countries, helped the world deal effectively with the current financial and economic crisis. The G20 has already delivered a number of significant and concrete outcomes coordinated expansionary macroeconomic policies, including the fiscal expansion of US$5 trillion coordinated unconventional monetary policy instruments significantly enhanced the financial regulations, notably by the establishment of the Financial Stability Board(FSB); and substantially strengthened the International Financial Institutions(IFIs), including the expansion of resources and the improvement of precautionary lending facilities of the IFIs.
  55. 55. G20 Toronto 2010 Source:
  56. 56. G20 Toronto 2010 Source:
  57. 57. Influence of government economic forums World Economic Forum: The World Economic Forum is an independent international organization committed to improving the state of the world by engaging leaders in partnerships to shape global, regional and industry agendas. Incorporated as a foundation in 1971, and headquartered in Geneva, Switzerland, the World Economic Forum is impartial and not-for-profit; it is tied to no political, partisan or national interests. The World Economic Forum is under the supervision of the Swiss Federal Government.
  58. 58. Influence of government economic forums World Economic Forum:
  59. 59. Influence of government economic forums World Economic Forum:
  60. 60. G20 more important than G8? Why?
  61. 61. Trade Agreements As trade has grown and economies have become more integrated, countries have formed trading alliances Two types of trade agreements: Preferential free trade agreements - bilateral or regional - between two countries or a region Multilateral free trade agreements - open to all nations
  62. 62. Trade Agreements Preferential free trade agreements. Examples: Bilateral (important but limited) CERTA (NZ-Aust) SAFTA (Sing-Aust) TAFTA (Thailand- Au) AUSFTA (US-Au) Regional (increasingly important) EU ( European Union) NAFTA (North America) APEC Forum ( Forum Asia Pacific) AFTA (Asean) Multilateral free trade agreement examples: Global (Key vehicle of globalisation) WTO (World Trade Organisation)
  63. 63. Economic Integration
  64. 64. Introduction
  65. 65. Trading Blocs, Monetary Unions and Free Trade Agreements
  66. 66. Four stages (types) of economic integration FTA (free trade area): no internal tariffs among members, but each country imposes its own external tariffs to the third country. NAFTA (North America Free Trade Agreement AFTA (ASEAN Free Trade Area) EFTA (European Free Trade Area) Customs union: no internal tariffs and common external tariffs Mercosur (Southern Common Market), CACM (Central American Common Market) CARICOM (Caribbean Community and Common Market)
  67. 67. Four stages (types) of economic integration Common market: free movement of products and factors (resources), which is customs union plus factor mobility EU (European Union – previously EEC) Economic union: common market plus common currency coordination of fiscal and monetary policy EMU (Economic and Monetary Union)
  68. 68. Economic effects of economic integration Static effects: Short-term effects (shift of production) Trade creation: production shifts to more efficient member countries from inefficient domestic or outside countries. Trade diversion: production shift to inefficient member countries from more efficient outsiders. Dynamic effects: Long-term effects Cost reduction due to economies of scale Cost reduction due to increased competition.
  69. 69. History of EU Treaty of Paris (1951) Formation of ECSC (European coal and steel community) by six countries Treaty of Rome (1957) Formation of EEC (European economic community), initially free trade area, becoming a customs union in 1967. The Stockholm convention in 1960 created EFTA by seven countries to counteract EEC.
  70. 70. History of EU Continued Single European Act of 1987 Creation of single market (Common market) effective on Jan. 1, 1993 Rename EEC by EU (15 members) Treaty of Maastricht (1992) Creation of an economic union, EMU (11 members) Establishment of European Central Bank on July 1998 Introduction of a common currency, euro on Jan. 1, 1999 Circulation of euro on Jan 1, 2002
  71. 71. Organization of EU European Commission: administrative body of 20 members Initiate proposals Guardian of the treaties Implementing policies European Parliament 626 members elected according to population distribution Legislative body, but final decision by Council of Ministers Control over budget and supervision of the Commission
  72. 72. Organization of EU Continued European Council and Council of Ministers European Council: summit meeting of state heads, providing guidelines Council of Ministers 25 different councils (agriculture, transport, etc.) Final say on legislations Different votes allocated to individual countries (according to population) Unanimity or qualified majority voting required depending on issues. Others Court of Justice, Court of Auditors, sub-committees
  73. 73. EMU (Economic & Monetary Union) Common currency (Euro) area for 11 members Euro became the official currency unit on Jan. 1, 1999. Euro will be in circulation from Jan. 1, 2001 U.K, Denmark and Sweden opted out. Greece was not qualified. European Monetary System in 1979  European Monetary Institute in 1994  European Central Bank in July 1, 1998 Convergence criteria Inflation (no more than 1.5% above the 3 lowest ave.) Long-term interest rate (no more than 2% above the 3 best ave.) Budget deficit: no more than 3% of GDP Public debt: no more than 60% of GDP
  74. 74. Remaining Issues of EU Further elimination of barriers to common market Compatible standards and specifications No barriers to market access Coordination of VAT and other taxes Expansion European Economic Area: extension of customs union privileges to EFTA member countries (Norway, Iceland and Liechtenstein accepted. Switzerland voted not to join) Special agreements with Turkey and others Expansion to central and eastern European countries Fast-track applicants Other applicants
  75. 75. NAFTA North America Free trade Agreement Free trade area among the U.S., Canada and Mexico The largest trading bloc in terms of GNP A good example of trade diversion (production shifted from Asia to Mexico) History Automotive products Trade Agreement (1965) between the U.S. and Canada Canada-U.S. Free Trade Agreement (1989) NAFTA (1994)
  76. 76. Provisions of NAFTA Elimination of tariffs Most tariffs will be eliminated by 2004 The remaining by 2008 Elimination of nontariff barriers Harmonization of trade rules (subsidies, antidumping, safety standards) Liberalization of capital movement (FDI) Protection of intellectual properties Dispute settlement Provisions on labor and environmental standards
  77. 77. Economic Effects of NAFTA Trade Trade among members increased faster than trade with the rest of world Investment Mexico is the main beneficiary (FDI not only from the U.S. and Canada, but also from other countries) Employment Difficult to measure because of too many confounding variables Overall employment effect in the area including the U.S. has been positive
  78. 78. Issues related to NAFTA Rule of origin and local content Rule of origin: products must originate from North America to get preferential treatment. Local content: the percentage of value of a product that must be from North America to be considered as North American origin Currently 50% for most products and 62.5% for autos. Political pressure to increase this percentage Expansion of membership Potential entry by Chile, and some central and south American countries FTAA (Free Trade Area of America) proposal in 2001
  79. 79. Other Regional Trade Blocs ASEAN and AFTA Originated in 1967 Formation of AFTA in 1993 Reduction of intrazone tariffs to a maximum of 5% by 2008 (by 2004 for some countries) Mercosur (Southern Common Market) Formed in 1991 by Brazil, Argentina, Paraguay and Uruguay. Aim for a customs union, but not yet
  80. 80. Other Regional Trade Blocs Others Andean group (Andean Common Market) ALADI (Latin American Integration Association) CARICOM (Caribbean Community and Common Market) CACM (Central American Common Market)
  81. 81. APEC Asia Pacific Economic cooperation Formed in 1989 to promote trade and investment 21 member countries that border the Pacific Rim APEC is not a trading bloc For trade liberalization and against protectionism Prefer open regionalism over closed regionalism Goal: Free and open trade by 2010 for the industrialized countries by 2020 for the rest of the members
  82. 82. Protection Defined as: government policies which give domestic producers an artificial advantage over foreign competitors, such as tariffs, import quotas and subsidies. Historically imposed by most countries to assist local producers and shield them from overseas protection
  83. 83. Protection Reasons for protection Infant industries New industries face difficulties and risks in their early years Therefore they may require temporary protection They should not encourage to rely on assistance Prevention of dumping Some countries attempt to sell their goods at unrealistically low levels to dispose of a surplus or establish a market Therefore it is in the economy’s best interest to impose restrictions on such imports
  84. 84. Protection Protection of domestic employment Some argue if local producers protected from competition the demand for local goods will be higher - therefore higher employment However if protection distorts the allocation of resources away from areas of efficient production to areas of less efficient production, therefore in the long run higher levels of unemployment will occur Defence and self sufficiency Sometimes there are non economic reasons for wanting to retain certain industries- eg the defence industry or self sufficiency of food supply
  85. 85. Protection Other arguments for protection Trade unions argue that protection is needed to shield workers from low cost labour and to protect the living standard of workers in high income countries Countries sometimes block trade for environmental reasons eg to prevent destruction of natural resources eg rainforests Some countries argue that protection is necessary for specific cultural purposes, eg rural values, environmental or heritage values
  86. 86. Methods of Protection Tariffs A government imposed tax on imports. This raises the price of an imported good, making the price of a local one more competitive. The effects of tariffs: Can stimulate production and employment More resources are allocated to the industry Consumers pay a higher price for goods Tariffs raise revenue for government A retaliation effect can be experienced
  87. 87. Methods of Protection Quotas An import control on the volume of goods that is allowed to be imported over a given period of time. This guarantees domestic producers a share of the market. Effects of quotas: Similar to tariffs, limit numbers imported Do not collect revenue for government Some revenue can be obtained via sale of import licenses Tariff quotas can also be applied.
  88. 88. The problem with trade assistance…
  89. 89. Methods of Protection Subsidies Government provides financial assistance to domestic producers to assist them in reducing their selling price and compete more easily with imported goods. Effects of subsidies: Most economists prefer them to tariffs Subsidies are an expenditure by government, so tend to be temporary Tend to reduce prices, leading to lower inflation
  90. 90. Other methods of protection Voluntary export restraints - countries agree to restrict their exports for a similar concession Local content rules - goods must contain a certain % of local parts Export incentives - grants, loans technical advice given by government to expand exports