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STUDY BUDDY

The Global Economy


International Economic Integration
The Global Economy and Economic Integration

Over time, the liberalisation of trade + globalisation has allowed for greater
economic integration
- Examples of economic integration are the EU, NAFTA, APEC, AFTA
- Allows for greater amount of intra-regional trade and intra-industry trade
o Ultimately results in increased investment flows and standard of living

The Global Economy

The IMF publishes the World Economic Outlook - classifying countries into two
groups:
1. Advanced Economies - high levels of economic development with average
incomes over $30,000 US/annum. Generally are market based with free
enterprise systems of resource allocation and limited government
intervention
2. Emerging/Developing Economies - India, China, Brazil and transition
economies (formerly Communist) in Eastern Europe. These are in the process
of raising rates of eco growth/development but have lower per capita
incomes and living standards than advanced economies.
The advanced economies dominate world GDP and trade 52% of world GDP and
64% of world exports in 2010 BUT only represent 15% of total world
population!
Currently, the major emerging economies of Brazil, Russia, India and China have
sustained rates of high eco growth and account for 25% of world GDP
The developing countries are located in Asia, Middle East and North Africa
members of the Organisation of Petroleum Exporting Countries (OPEC) with
significant oil exports to the world. in 2010, accounted for 48% of world GDP, 36%
of world trade and 85% of world population

Gross World Product

World GDP at purchasing power parities (PPP) is the total market value of G/S
produced in the world over time adjusted for inflation + exchange rates
World output was US $74,275b in 2010
Advanced economies (34) accounted for 52% of world GDP whilst emerging
economies (150) accounted for 48% of world GDP in 2010 small number of adv
economies dominate the global production of G/S compared to the 150 other eco's.

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HOWEVER - in terms of growth of national GDPs, emerging and developing eco's


have been able to sustain higher rates of growth than adv eco's and their share of
world GDP has increased over time
- In 2010, China and India contributed 13.6% and 5.4% of world GDP
exceeded world GDP of Euro Area (14.6%) and almost exceeded the US
(19.7%)
- Adv eco's face challenges in sustaining future rates of GDP
o Financial restructuring post-GFC
o Ageing population - limits productivity + increasing stress on govt
funds


Globalisation and Economic Integration

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Globalisation - refers to the increasing level of economic integration between


countries, leading to the emergence of a global market place/global economy
Economic integration - occurs when trade barriers are reduced or removed between
countries to facilitate the growth in free international trade and flows of investment
- This occurs through FTA's, standardisation/customisation of G/S on a global
basis and technological change conducting electronic commerce (e-
commerce)
- Created a world financial system leading to increased innovation - the IT
revolution
- International trade is increasingly linked with FDI firms gain access to
foreign markets.
o 1992 - 1999 - world trade volumes grew at 6.6% per annum whilst FDI
grew by 23% per annum. Intra-firm trade now makes up 25% of world
trade
Globalisation is highly supported by adv eco's through trade liberalisation policies
and microeconomic reforms in commodity, financial and labour markets to increase
competitiveness
Emerging/developing eco's have also embraced policies to liberalise their trade and
promote internal eco reforms to capture the gains from international integration
HOWEVER - led to greater interdependence between nations and the rapid
transmission of 'financial contagion' evident through GFC 2008-09
- Negative effect on the distribution of income and wealth

World Trade, Financial Flows and Foreign Investment

Globalisation has generally led to higher growth in world output and higher growth
in world trade this trend was halted by GFC in 2009 due to increased risk of
lenders, higher cost of credit and increased volatility in asset prices + exchange rates
- Global output contacted by -0.5%
- Exports overall contracted by -20%
During downswings such as GFC, global trade has contracted faster
than world economic output (GDP) highlighting the greater
volatility of trade compared with GDP.
Developments in foreign exchange markets have mirrored the rapid growth in the
turnover of financial markets, with the holdings of financial assets growing faster
than economies in general
$A was 5th most traded currency in 2010


Globalisation Total FDI in 2008 is 6 times its level since 1995
and Foreign The general growth in Foreign investment has been due to the easing
Investment

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TNC's and
Foreign
Investment

Global
Production
Webs

of capital controls between countries due to financial deregulation


TNC's/MNC's are responsible for much of the world's FDI since they
set-up subsidiaries in other countries to gain access to global markets
TNC's are large and have influenced the pace and spread of
globalisation
Wal Mart Stores were the largest MNC by revenue in 2011 - $US422b
China has got many state owned MNC's (61) ranked 3rd in the world
In competing for FDI, many govt's offer incentives to TNC's such as tax
allowances, govt assistance, infrastructure and less environmental
regulations can cause an imbalance in the countries bop
- They benefit the country through the transfer of technology,
employment, tax revenue and exports
Globalisation has resulted in the emergence of strategic global
production networks established by TNC's where the production
line takes place in different countries
Manufacturing plants tend to be located in places with low labour costs
and favourable govt policies China, India, South Korea, Hong Kong
Developments in technology, transport and communications have
enabled TNCs to utilise global supply chains where they source the
cheapest inputs of production
THEREFORE - expansion of transport networks has become a major
feature of global distribution

Technology, Transport, Communications and Labour


Technology

A major change to the global economy and globalisation has been


the IT revolution greater productivity of labour and capital in
production and has reduced costs of international business
economies of scale
Led to structural change to G/S distribution methods electronic
commerce
Technology diffusion - when innovation leads to high exports of
new IT products
Transport
Roads, railways, ports, airports are vital for business operations
Transport networks vary between economies
Communications IT has led to growth in telecommunications mobile
phones/internet
International
Refers to the specialisation of people according to labour tasks in
Division of
production closely linked with TNC's which compete for lower
Labour and
labour costs de-industrialisation and job displacement in adv
Migration
economies as industries locate offshore
Outsourcing of telecommunications to Philippines is an example
High skilled labour in IT and Medicine are in demand in adv eco's

The International and Regional Business Cycles

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Average world growth in output was 3.9% between 1997 - 2008 (prior GFC)
Average world growth during global resources boom 2004-08 was 5%
- Larger economies (China, Russia, India, Brazil) grew around 7.5% during that time
GFC led to a fall in output contraction in world GDP of -0.5%
Since national economies are increasingly linked through the process of
globalisation, changes in the international business cycle will impact directly on
domestic business cycles
- Changes in US business cycle usually affect the rest of the world
NOTE:
- Peak = supply or capacity constraints where inflation begins to rise and growth in
output is no longer available 2006-07 global growth peaked at 5.2%
- Recession = minimum level of global output GFC -0.5% contraction in
growth

Impact on
Economies

External
Shocks on
Economies

Changes in the IBS has varying effects based on a countries level of


internationalisation + integration of an economy
If world growth > domestic growth, current account surplus
(X>M) KNOW THIS
higher growth X rate
Real Shocks - refers to changes in world output, commodity prices or
technological change cause structural changes to occur in an
economy
- E.g. (-VE) oil crisis 1970s caused inflation & slowdowns in
growth stagflation
- E.g. (+VE) global resources boom 2004-07 lifted world
growth over 5%
Financial/Monetary Shocks - transmitted faster than real shocks
through changes in asset prices (interest rates/share prices)
- E.g. (-VE) collapse in the sub-prime mortgage market US
causing GFC

Global Resources Boom 2004-07

In this period, growth of 5% was above the trend of 3.7% between 1972-2004
- Rapid expansion was based across China, Europe + Japan
The effects of growth led to;
1. Stronger demand for resources
2. Higher rates of capacity utilisation led to increased investment in new plants
+ equipment
3. Rates of unemployment fell
Australia - as a commodity exporter benefited greatly X grew by 2.6% 46.5%
of all X were commodity.

GFC 2007-09

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International financial markets experienced volatility due to the collapse in the sub-
prime mortgage market in US in 07
- Led to bankruptcies reflecting a decline in credit worthiness of borrowers and
lending standards
Transmitted to international financial markets asset prices for shares, bonds and
other securities fell + increase in IR to reflect the cost of borrowing
Sentiment in global financial markets deteriorated in 08, as banks tightened funding
to leveraged investors triggering the sale of assets
- Worsened with the collapse of Lehman Brothers merchant bank
GDP grew by just 1.1% in 08
The increasing extent of financial and trade integration between adv and emerging
eco's facilitated the spread of the GFC
Since GFC the responses of govt include;
1. Governments extended guarantees for bank deposits
2. Central banks cut official interest rates
3. Fiscal stimulus packages to boost growth and support employment

Changes in World Trade, Financial Flows and Foreign Investment

As global integration proceeds, developing eco's are more likely to expand their
share of the global economy China, India, Brazil, Russia
Major trends to emerge in world trade + finance throughout 1990s-2000s include;
1. Globalisation of world trade led to a global market place dominance of
TNCS
2. Growth of intra-regional trade (EU, NAFTA,APEC etc) saw FDI
3. Growth of Asia-Pacific region and China
4. Growth of trade in elaborately transformed manufactures (ETMs)
Main reasons for increasing world economic and trade integration include;
1. Financial deregulation and floating exchange rates increased the mobility
of capital
2. Reduction in trade barriers has increased trade flows
3. Increased specialisation in ETMs and services
4. Collapse of communism in former Soviet Union and eastern European
countries increased the demand for capital
5. Rise of regional economic integration through trade agreements
increased intra-regional trade flows

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Globalisation and Economic Development


The Differences Between Economic Growth and Economic
Development

Purchasing Power Parity (PPP) - theory that states that exchange rates should adjust
to equalise the price of identical G/S in different economies throughout the world
Economic Growth - refers to the increases in real GDP over time (quantitative)
rising national output, incomes, employment and living standards comes from;
1. Increased use of resources land, labour, capital and enterprise
2. Increased productivity of existing resource use rising labour and capital
productivity
Capital Widening - occurs when capital keeps pace with growth in
labour force
Capital Deepening - occurs when capital grows faster than labour
force

Economic growth leads to an outward shift in PPF

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Economic development is a broader concept than EG that attempts to measure


improvements in well-being or welfare, rather than simply how much extra money
people have quality of life indicators Qualitative
Economic development refers to the process of structural change needed for eco-
growth to occur ED is a qualitative process involving the development of an
economy's economic and social infrastructure.
- Changing from a rural based agricultural society to an industrial and service
urban based society
- Composition of the workforce also changes specialisation of production and
higher output with greater technology
- E.g. construction of roads, railways, schools, hospitals, bridges, airports are
examples of ED
- Process of ED is shown by the link between savings, investment and resource use
leading to EG
ED involves the use of more resources/better quality to improve the distribution of
income and deliver increases in living standards through a 'trickle down effect'
where benefits of EG spread throughout the whole population
Greater participation by a country in globalisation can lead to increased foreign
investment and transfers of technology and management skills, which can assist the
process of economic development

The Global Distribution of Income and Wealth

Despite the economic benefits of globalisation, the rewards are not shared equally
between advanced, emerging and developing countries
Despite poverty levels falling (US$1.25/day) (from 1.9b 1981 - 1.4b 2005) there are
still regional differences
- Greatest reduction in poverty occurred in East Asia where it declined from
78% 1981 to 17% in 2005 fell by more than 750m (mostly in China)
- World Bank estimated that 90m more in poverty due to GFC in developing
countries
Distribution of world income is measured by Gross National Income (GNI) per capita
i.e. income per head of population World Bank classifies countries into;
1. Low income countries (>$) - Africa (mainly) Niger
2. Lower middle income countries ($996 - $3945) Eastern Europe Ukraine
+ Middle East (Iraq)
3. Upper middle income countries ($3946-$12,195) South America
(Mexico/Brazil)
4. High income (<$12916) US, AUS, NZ
The global distribution of wealth refers to a comparison of the ownership of net
assets between countries and regions of the world
- Measures net assets rather than average national income

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- Global distribution of wealth in more uneven than the distribution of income


North America and Europe account for 64% of global wealth

Income and Quality of Life Indicators

Standard of living in different countries is measured and compared in terms of GNI


and a range of other material and non-material indicators (literacy, nutrition, health
services) which measure the quality of life
GNI per capita is a basic indicator of ED of a country since it measures the standard
of living in that country
Demographic indicators include particular population or human capital feature of
development
- Medium and low development nations account for 70% of global
population but account for 25% of world GDP
- High development economies account for 30% of global population and
produce 75% of world GDP
The extent of urbanisation in high eco's (76.6% in 2010) whilst it ranged from 33-40%
in lower eco's reflecting higher concentrations of populations in rural areas, where
agriculture is carried out
Australia was ranked 2nd in HDI 2010

Developing, Emerging and Advanced Economies

A major change in the global economy has been the importance of developing and
emerging economies (150 in total) in their contribution to world output/trade
Major emerging eco's of Brazil, Russia, India and China (BRICs)have been dominant in
sustaining higher rates of growth than the adv eco's
1. Developing Economies - Congo/Niger economic integration has not really
occurred in many developing countries lack of resources/governance and
higher trade barriers
2. Emerging Economies - BRICS increased their contribution to world
output/trade and are undergoing rapid economic development
3. Advanced Economies - US, Aus, Canada account for 52.3% of world GDP -
34 advanced eco's exist today.




Reasons for Differences in Economic Development between Nations

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Contrast in the level of economic development between countries is referred to as


the 'Development Gap' since they are distinguished by lower incomes, lower
savings, investment and economic growth
- Emerging countries (BRICS) are quickly closing this gap by sustaining higher
eco growth etc.
Development gap leads to significant contrasts in living standards between
economies
- Since lower eco's are in southern hemisphere and most adv are in northern
the income gap is referred to as the 'North-South Divide'
Reasons for these differences include;
1. Low per capita incomes reduce the ability to save and invest difficult to
achieve high productivity
2. Lack of infrastructure and capital formation prevents efficient use of
labour and capital
3. Low levels of technological progress and labour productivity lower EG
4. High population growth rates leads to high dependency ratios and increases
demand for education, health, employment etc population outstrips EG
living standards fall and this can impact on ED
5. Institutional problems from corrupt and inefficient governments leads to
political instability, civil wars and disorder undermines flow of FDI to
support ED

The Effects of Globalisation on Economic Development

Globalisation (economic integration) has resulted from reduced trade barriers and
greater financial market liberalisation led to growth in world GDP, trade and
financial flows and FDI
Globalising economies (BRICS) grew on average 5% in 1990s compared to the non-
globalising countries growing at 1.4%
- Led to a large reduction in world poverty and an improvement in HDI
closing the income gap
Other effects of globalisation include;
1. International convergence - of economic systems as more countries adopt
market capitalism and democracy
2. Risk of financial contagion - as financial crises can be transmitted quickly
GFC
Despite the positive impacts of globalisation on some countries, it has tended overall
to reinforce the existing income disparities between advanced, emerging and
developing countries
- Since 1990, 20 countries has suffered a reversal in their HDI according to the
World Bank

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- Setbacks occurred mainly in Sub Saharan Africa where countries hardly


experience EG or ED
- Reflective of the impact of HIV/AIDS epidemic on life expectancy

Global Trade, Investment and Transnational Corporations

World trade in G/S grew by 8% between 2003-08 global resources boom


Emerging eco's increased their exports by 9.7% compared with adv of 5.6%
In 2009, world trade contracted by -12% due to GFC
Underpinning much of the trade growth has been the liberalisation of trade regimes
has been a shift with ETMs trade (high technology goods), services and
intellectual property
- TNCs create a web of global production facilities leads to intra-industry
trade some TNCs sales value exceed the value of developing GDPs
FDI reached US$2 trillion in 2008 16% decline during GFC

Environmental Sustainability

Environmental problems have worsened as global economic activity increases and


overpopulation puts pressure on natural resources
Developing countries have pursued ED often at the expense of environmental quality
deforestation and desertification as they expand agricultural production
Increasing rates of industrialisation and urbanisation in the emerging and developing
world have also led to higher levels of pollution and greenhouse gases
Average global temperature is predicted to increase by 3.5 degrees Celsius between
2000 and 2100 if global measures are not taken to reduce greenhouse gas emissions
Stern Report 2006 - recommended the development of a global carbon trading
scheme to reduce global emissions climate change poses risks for ED with greater
risks for people in developing economies who have the least resources to adapt to its
impacts