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Outputs
Time
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and inflation rates (external forces) for the group of seven (G7) largest
economies.
The transmission of economic conditions from one country another is made
more immediate by the increased integration of economies during the
globalisation era (how economies are linked)
Trade flows
There is a boom or reception in one country, this will affect its demand
for goods and services from other nations, the level of growth in an
economy will have a flow on effect on economic activity on other
economists
Investment flows
Strong economic conditions in one country will make it more likely
that businesses in that country will invest in new operations in other
nations, which will then add to their economic activity. in the late
2000s one of the causes of slow FDIs in flows in developing countries
was weaker economic performance in the USA
Transnational corporations
TNCs are an increasingly important means by which global upturns
and downturns are spread throughout the global economy. In 2011 for
eg, Toyota temporarily reduced its manufacturing operations in
Australia because of the impact of earthquakes and tsunamis in Japan
and on the company
Financial flows
Short term financial flows also play an important role in transmitting
the international business cycle. A 2009 IMF paper how linkages fuel
fire, conclude that 70% of financial market volatility in advanced
economies is transmitted to emerging economies and the transition
takes one to two months
Financial market and confidence
Consumer confidence and the animal spirit of investors are
constantly influenced by conditions in other countries. This is
highlighted by the strong correlation between movements in share
prices of the worlds major stock exchange i.e. they lead to
synchronised fluctuations
Global interest rate levels
Monetary policy conditions in individual economies are increasingly
influenced by interest rate changes in other countries. If weak
economic growth makes it necessary for the central banks to lower
interest rates in the USA, this places pressure on central banks in
other economies to follow suit
International organisations
International forums such as the Group of Twenty (G20) or Group eight
(G8) can play an important role in influencing global economic activity.
Discussions of global economic conditions at summit meetings means
that the G20 or G8 can act as the unofficial forums coordinating global
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Prior to the WTO the General Agreement on Tariffs and Trade (GATT)
was responsible for developing trade agreements (1997)
The Uruguay Round led to the WTO agreement. For the first time, the
scope of the trade agreement went beyond trade in goods to include
trade in services (such as insurance and banking) and intellectual
property (such as patent, copyright, trademarks, etc.)
The WTOs membership is growing with 155 countries in 2010 and 29
further countries applying to join.
If the Doha Round is successful in its ambitions of deregulations, the
World Bank estimates that the resulting increase in global trade would
increase global economic activity by $520 billion by 2015 and lifting
over 140 million people out of poverty in the developing world.
However, the Doha Rounds ambition to lift millions of people out of
poverty is under jeopardy after difficulty negotiations with member
nations in implement these goals ( the developed would not free up its
agricultural market to the developing world) (2008)
The WTO intends to broaden its agenda to include issues such as
economic development, exchange rates, and climate change and foods
security.
International Monetary Fund (IMF)
The international Monetary Fund is one of the most important
institutions in the global economy. It has 186 members, covering
almost all nations
The role of the IMF is to maintain international financial stability
In situations where a financial crisis occurs in an economy, region or
even across the world the world, the IMF plays a critical role in
minimising the crisis
In response to the GFC, the IMF injected $250 billion into the global
economy, to promote liquidity in the global financial system, and
provided specific support for countries hard-hit by the crisis to
stimulate their economy
The IMFs policies are to support the free trade of goods and services
and the free movement of financial and capital throughout world
markets. The IMF often require countries to change their economic
policies and open up their market before they receive financial
assistance (structural adjustment policies)
The impact of the IMFs policies approach is increased by the fact that
many international banks and other private leaders require that
country to adopt IMFs support policies before they are willing to lend to
those nations
The IMFs structural adjustment policies have played an important role
in the process of globalisation, effectively ensuring that most
economies have adopted similar economic strategies in recent years
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World Bank
The World Banks role in the global economy is primarily concerned
with helping poorer countries with their economic development
The official title of its main organisation is the international Bank for
reconstruction and development
The focus of the main organisation (IBRD) is to:
- Fund investment in infrastructure
- Reduce poverty
- Help countries to adjust their economies to the demand of
globalisation
Other Organisations within the World bank that provide specific
assistance to lower income countries:
- The international Development Association provides soft loans
(i.e. loans at little or no interest to developing countries
- The International Financial Corporation has the role of attracting
private sector investment to the Banks project
- The Multilateral Insurance Guarantee Agency provides risk
insurance to private investors
The World Bank is funded by contributions from member countries and
from its own borrowing in global financial markets
The World Banks major aim (as set out in the millennium Development
Goals) has been to reduce the proportion of people living on less than
$1 a day to half the 1990 level by 2015 (from 29 precent to 14.5
precent of all people in low-and-middle income economies
In response to the GFC in 2008, the World Bank has provided over
US$280 in assistance to developing countries. Furthermore,
immediately after the GFC the World Bank tripled lending from $13.5
billion to 35 billion to assist lower income economies.
The World Bank in recent years has been its support of the Heavily
Indebted Poor Countries Initiative (where the World bank relieves
countries that are in debt because it has borrowed)
United Nations
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The United Nations was established in 1945 aid has grown to cover 192
member states. Its agenda is broader than any other organisations,
covering the global economy, international security, the environment,
poverty and development, international law and global health issues
The UN has historically played an important role in supporting greater
linkage between economies and promoting globalisation
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Global agreements
WTO
Multilateral or Regional
agreements
EU
NAFTA
APEC
AFTA
AANZFTA
Bilateral
Agreements
CERTA
SAFTA
TAFTA
AUSFTA
CHAFTA
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Protection
Protection can be defined as any type of government action that has the effect of
giving domestic producers an artificial advantage over foreign competitors. The main
protectionist measure include tariffs, import quotas and subsidies
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Quotas
An import quota controls the volume of goods that is allowed to be
imported over a given period of time
- The diagram to the right reveals:
-
The curve SS, S1S1 and DD represent domestic demand and supply
Because of the subsidies domestic producers are able to reduce their
price resulting in a rightward shit of domestic supply curve from SS to
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Between 1981 and 2005, those living extreme poverty in developing countries,
living on less than $us 1.25 per day, fell from 52% to 25%. if we exclude china
from these calculations, however, extreme poverty rates fell much less
significantly over the same periods
Life expectancy in developing countries rose from 56 to 67 years between 1920
and 2009. Child mortality for those under five declined from 1 to 10 children in
1990 to 1 to 5 in 2009
The primary education completion rate in developing countries increased form
78% in 1991 to *7% by 2009, while the adult literacy rate in developing
countries reached 80%
While these figure show progress they also demonstrate how wide the gap are for
many people in the developing world, compared to the one billion people in
developed countries who enjoy what is described as a high level of human
development
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wealth), Europe (30 %) and rich Asia-Pacific countries like japan and
Australia (24%). The remaining countries share only a little over 10
% of worlds economic wealth.
There is a higher disparity in wealth than income
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Developing economies
- These are countries generally suffering from low income levels
- Suffer from weak human resources
- Have experienced industrialisation to a limited extent
- Have large number of people living in absolute poverty (less
than $US1.25 per day)
- Developing countries are often divided into the two groups, low
income and middle income
- While there are significant differences between developing
countries some common characteristics include
High levels of income inequality within their economies
Dependence on agricultural production for income,
employment and trade opportunities
Reliance on foreign aid and development assistance as a
major source of income
Reliance on foreign aid and development assistance as a
major source of income low levels of labour productivity,
industrialisation, technology innovation and infrastructural
development
Weak political and economies institutions, and a high
prevalence of corruption
Least developed countries
- The United Nations conference on Trade and Development has
also identified 48 countries that it this sub-group
- These countries suffer from the lowest GNI per capita level in
the world (less than $US905 per year)
- They suffer from weak human assists (based on economic
structure)
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Types of
Economy
Advanced
Income levels
High income
levels, with GNI
per capita above
$US 12,276
Low income
levels, with
around half of
population in
absolute poverty
Income levels vary
but what these
economies have in
common is fast
growth in income
levels
Developing
Emerging
Structure of
economy
Large service
industries and
advanced
manufacturing
Heavily reliant
on agriculture
and foreign aid
Examples
Industrialising ,
usually with
substantial
manufacturing
sectors
China
Brazil
Indonesia
United States
Germany
Korea
Bangladesh
Zimbabwe
Ethiopia
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Domestic Factors:
Natural resources
- Economies that have an abundant and reliable supply of cheap
natural resources clearly have a better opportunity for economic
development than those that do not, even if some have been
spectacularly unsuccessful in using these opportunities
- But an abundance of natural resources can also hamper a
countrys economic development if it leads to an overvalue
exchange rate, narrow export base and becoming over reliant on
a small number of industries to drive economic growth
Labour Supply and quality
- Labour is an output to the production process for many sectors of
the economy and is thus an important factor influencing
development levels. Whereas high income countries tend to have
highly educated & skilled labour resources, low income nations
are characterised by high population growth, poor education n
levels and low health standards, which reduce the quality of the
labour supply
Access to capital and technology
- Difficult in gaining access to capital for investment and
development in another major structural weakness of developing
nations that contributes to their lower living standards low
income levels provide little opportunity for savings that can be
used for investment. Poorly developed financial systems make it
difficult for businesses to gain easy access to loans for
investment purposes
Entrepreneurial culture
- The value of individual responsibility, enterprise, wealth creation
and a strong work ethic can assist the industrialisation process,
and the transition towards sustainable economic development
Institutional factors:
Political and economic institutions
- Political instability, corruption and a lack of law enforcement by
governments tend to undermine the confidence of investors who
will be reluctant to take risks if their business interests are
threatened by an inadequate structure for resolving legal
disputes, corruption or other institutional problems (i.e. Syrian
war)
Economic policies
- If all major decisions are left to market forces, a country may
achieve a high level of economic growth, but it may not improve
education, health care and quality of life. On the other hand,
excessive government control over economic decision making
can constrain entrepreneurship and innovation, reducing
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