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International economic integration

The global economy

- The global economy is where the economies of individual countries are
linked to each other and how changes in a single economy can have ripple
effects on each other
Gross world products
- GWP is the aggregate value of all goods and services produced worldwide
each year in the global economy.
Globalisation is the integration between different economies and the increased
impact of international influences on all aspects of life and economic activity.
- Trade in goods and services
International trade in goods and services is an important and indicator of
globalisation because it is a measure of how goods and services are
produced in an economy are consumer in other economies worldwide
Trade in goods and services has grown rapidly in recent decades,
increasing from $US 8.7 trillion (38% of global output) in 1990 to $US
40.8 trillion (70 % of global output) in 2009. The size of the gross world
product is now over ten times its level in 1950,but the volume of world
trade has grown to over 40 times its 1950 level
The size of global trade reflects the fact that economies do not produce
all the items they need, or they do not produce them as efficiently as
other economies (comparative advantage).
Composition of trade is the mix of what goods and services that an
economy trades. Global trade is dominated by manufacturing (e.g.
vehicles, clothing and electronic goods)
The direction of trade flows has changed in recent decades, reflecting
the changing importance of different economic regions. Between 1995
and 2009, high income economies saw their overall share of global
trade fall from 82% to 70% of world merchandise exports.
With Chinas economy playing an increasingly important role in the
global trade, other economies have placed an increased priority on their
trade relationships with China. Chinas economy has grown rapidly in
recent decades, and this points towards an expanding market for
exports in the future

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- Financial flows (portfolio)
Finance is the most globalised feature of the world economy because
money moves between counties more rapidly than goods and services
or labour
International financial flows have expanded substantially flowing
financial deregulation around the world, which is the most countries
occurred in the 1970s and 1980s. deregulation such as controls on
foreign currency markets, flows of foreign capital, banking interest rates
and overseas investment in share markets were lifted
Technological change also played an important role in the expansion of
international financial flows. New technological advancement and global
communication networking have linked financial markets through the
world and have reduced the cost of world trade.
An important feature of international finance are foreign exchange
markets (FOREX markets), which are networks of buyers and sellers
exchanging one currency for another in order to facilitate flows of
finance between countries. Foreign exchange markets have experience
extraordinary growth in recent years, with average daily turnover
reaching $4 trillion in 2010
Speculators are investors who buy or sell financial assets with the aim of
making profits form short term price movements
95 % of foreign exchange transactions are undertaken for the main
purpose of deriving short-term profits from fluctuations of currency
assets and shares, rather than being directed towards trade and long-
term investment.
The main benefits of greater global financial flows is that it allows
counties to obtain funds that are used to fund domestic investment

- Investment and transnational corporations (FDI)

Another indicator of globalisation is the rapid growth of investment
between countries over the past two decades.
One measure of globalisation of investment is the expansion of foreign
direct investment (FDI), which involve long term movement of funds in
order to buy over 10% of an existing company or to establish a market
position overseas
FDI flows are strongly influenced by the level of economic activity. the
recent GFC saw FDI flows fall significantly, because of the great risk of
investment in a recession period
FDI flows have traditionally favoured developed nations, with greater
industrial capacity and larger consumer markets; these advanced
economies (USA, Japan & Europe) were the natural destination.
However, in the 2010 for the first time in history, emerging economies
received more FDI flows than developed economies (China, Brazil and
Transnational corporations (TNCs) play a vital role in global investment
flows. Often, they will have production facilities in counties around the

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world, sourcing inputs from some counties, doing most of the
manufacturing in another country and doing packaging and marketing
tasks in another country (from the 1990s the number of TNCS have
grown from 37000 to 104000)
Because of the capital and job opportunities they bring governments
often encourage TNCs to set up in their country through supportive
policies like subsidies or tax concessions
Another significant cause of the growth of international investment is the
increased level of international merges and takeovers which typically
move line with changes in economic conditions
- Technology, transport and communication
Technological development facilitate the integration of economies
consider the following:
- Advancements in freight(transportation) technology like
standardised shipping containers (containerisation), cargo tracking
and more efficient logistics systems
- Advancement in telecommunication industry (cheaper and faster)
has allowed provision of commercial services to customers
- Advancements in computer and communication networks have
allowed money to move around the world in fractions of a second
- Advancements in transportation technology such as air craft and
high speed rail networks allow greater labour mobility between
economies as well as accessibility to tourism and travel for
- Technology influences globalisation as the driver for growth in
trade and investment
- International division of labour, migration
Labour market differ from markets for goods and services, finance and
incensement, in that they are for less internationalised. While money
can move rapidly around the world. Goods and services can move in
days and investment can be made in weeks, people can no move jobs
quite as freely
The world bank estimates that there are almost 200 million people who
have migrated to work in different countries in the orld, and that rising
labour supply pressure and income inequality could increase this level
The movement of labour between economies appears to be
concentrated at the top and bottom ends of the labour market
- At the top end, highly skilled workers are attracted towards
riches economies because of the higher pay and better
opportunities available in these countries. In effect, there is a
global market for the most highly skilled labour (scientists)
- At the bottom end of the labour market, low skilled labour is also
in demand in advanced economies where it may be difficult to
attract sufficient people born locally to do certain types of work
(basic skilled: taxi)
These trends (high & low skilled movements of labour) reflects and
international division of labour whereby people move to the jobs where

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their skills are needed, while globalisation of the labour market is
increasing but there are still significant barriers to working in other
countries (migration restrictions)
The international division of labour is also evident from aspect of the
world economy (shifts in businesses between economies, rather than the
shift of people). Just as people may move between countries in search of
the best jobs opportunities, corporations shift production between
economies in search of the most efficient and cost efficient labour. In a
globalised business environment, many producers operate what is
sometimes a global supply chain (where production facilities are in
several countries). This is known as offshoring or outsourcing
The international division of labour reflects the economic concept of



comparative advantage (economies produce what they are good at)

The regional and international business cycle
o International business cycle
- Business cycle refers to the fluctuating patterns that economies go through
overtime, from above to below average growth. This is caused by changes
in the level of aggregate demand and supply
- Just as individual economies experience stronger and weaker periods of
economic growth, so too does the global economy.
- The ebb and flow of world economic growth is known as the international
business cycle, which refers to fluctuations in economic activity in the global
economy over time
- Although economic growth differs greatly between countries, for most
countries, economic growth is stronger when the rest of the world is growing
strongly and weaker when other countries are experiencing a downturn this
primarily highlights the strong relationship between the economic growth
performance of the words major economies and how intergraded economies
have become.
Evidence: the RBA has revealed that 63% of changes in the level of
output (performance) in Australia rely on interest rates, growth levels,

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and inflation rates (external forces) for the group of seven (G7) largest
- 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
- 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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macroeconomic policy especially during periods of economic

Never the less, it is important to note that despite these linkages, the pattern and the
pace of economic growth differ between countries. Even countries that are at similar
stages of economic development, such as the USA and European economies,
experience differing levels of economic growth. Despite the global linkages described
above, many of the factors that influence the business cycle differ between

Interest rates
Interest rates have a significant influence, through monetary policy, in
the stimulation or dampening of economic activity. therefore,
differences in interest rates between economies would reduce the
level of influences that economies have on each other
Our interest rate levels relatively high compared to other advanced
economies, reflecting our better economic position
Fiscal policies
Government fiscal policies also have significant effect upon the level of
economic growth in the short & medium term. For instance, an economy
that raises taxes and another that reduces taxes will have adverse levels
of economic growth
Our budget is returning to fiscal consolidation (returning to balance),
while other economies are struggling with record budget deficit as they
desperately attempt to stimulate their economies
Exchange rates
Exchange rates (value of currency) differ between countries and impact
on the level of trade competitiveness and confidence with economies
The Australian dollar is currently experiencing upward trend of
appreciation while other currencies after the GFC are struggling with a
depreciating currency. This reflects Australias strong trade performance
and confidence in our economy
Structural factors
Economies have different comparative advantage, resources and
attitude towards consumption and savings. They vary in terms of
reliability and resilience in their financial systems, population growth
rates and age distribution and different methods of regulating labour
markets, educating and training employees and regulating business.
These structural factors influence the competitiveness of economies and
their level of growth

Regional factors
The physical location of economies and their involvement in trade
relationships, trade agreements and international organisations, to a
large extent will affect an economys involvement in the global market
(e.g. Australia is geographically isolated)

o Regional business cycle

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Similar to the international business cycle, regional business cycle refers to
the changes in economic activity in a particular region. In the same way that
countries activity can be affected by global changes, they can also be
affected by regional changes. While changes in US economy will have ripple
effect around the world, they can have more profound impacts in North
America on the nearby Canadian and Mexican economies because of their
integration through the North American Free trade Agreement
In the East Asian region, economic conditions are dominated by the influence
of Japan & China (2nd and 3rd largest economies). While historically, a regional
business cycle in Asia has been less pronounced, it has strengthened in
recent years because of increased integration between Asian economies. This
has had implications for countries like Australia which is now more
synchronise with conditions in East Asia that it is with the USA & European
business cycle.
Other regions around the world have a higher proportion of developing of low
income economies and they tend to be less regionally integrated. In Sub-
Sahara Africa, for example, many economies such as Uganda are dependent
on high income economies for more than 80% of their exports and are
therefore as likely to be influenced by conditions in the world economy as
they are by neighbouring African economies
While regional business cycle ted to be dominated by the largest and most
global economies, it is also important to recognise the complexity of
conditions at the regional level. For example, while the Greek economy is one
of the smaller economies of the European Union, its sovereign debt problems
in 2011 triggered a less confidence in financial that spread to neighbouring
economies, contributing to regional financial instability
Clearly, regional business cycles can be quite different from pattern in global
economic activity, with some regionals performing more strongly than others,
and fluctuating more independently from other regions

Trade, financial flows and foreign investment

Trade is vital for economies in pursing economic growth. It allows economies to
produce greater output that they preciously did by exporting their comparative
advantages. Economies today are trading greater proportions of what they produce
creating greater wealth for individual economies around the world

The basis of free trade

Free trade can be defined as a situation where governments impose no
artificial barriers to trade that restrict the free exchange of goods and
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services between countries with the aim of shielding domestic producers
from foreign competitors
The argument for free trade is based on the economic concept of
comparative advantage
Comparative advantage is the economic principle that nations should
specialise in the areas of production with comparative efficiency which
is measured as the lowest possible opportunity cost, and trade with
other nations so as to maximise both nations standards of living
Example: if Australia gives up fewer computers to produce another unit
of wine that does United states, then Australia has a lower opportunity
cost that united states, thus is said to have a comparative advantage in
wine production

Advantages of free trade Disadvantages of free trade

Trade allows countries to obtain goods and services that An increase in short term unemployment
they cannot produce themselves, or in sufficient may occur as some domestic business may
quantities to satisfy domestic demand. This would find it hard to compete with imports.
generally occur because of a lack of adequate resources. However, the short term rise in
For example, a country may lack the necessary unemployment should correct itself in the
technology to produce certain manufactured goods long term, as the domestic economy
redirects resources to areas of production in
which it has a comparative advantage
Free trade allows countries to specialise in the Free trade may encourage environmentally
production of the goods and services in which they are irresponsible production methods because
most efficient. This leads to a better allocation of producers in some nations may produce
resources and increased production within countries, goods at a lower cost because of weaker
and throughout the world environmental protections and
environmentally damaging practices
Free trade encourages the efficient allocation of Production surpluses form some countries
resources. Resources will be used more efficiently may be dumped (sold for unrealistically low
because countries are producing the goods in which prices) on the domestic market, which may
they have a comparative advantage hurt efficient domestic industries
A greater tendency for specialisation leads to economies It may be more difficult to establish new
of scale, which will lower average costs of production businesses and new industries if they are
and increase efficiency and productivity even further not protected from larger foreign competitors
International competitiveness will improve as domestic
businesses face greater competitive pressures from
foreign producers, and governments will encourage
domestic industrial efficiency
Free trade encourages innovation and the spread of new
technology and production processes throughout the
Free trade leads to higher living standards as a result of
lower prices, increased production of goods and services
and increased consumer choice as countries have
access to goods that a lack of natural resources may
otherwise prevent. The opening up of global markets
leads to higher rates of economic growth and increased
real income

Role of international organisations

World Trade Organisation (WTO)
The World trade organisation is one of the most powerful global
economic institution
The role of the WTO is to implement and advance global trade
agreements and to resolve trade disputes between economic

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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
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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Part of the IMFs structural adjustment policies is that it asks
developing economies embrace the global economy by advising them
- Cut the size of government
- Privatise government owned industries
- Deregulate market policies that inhibit business practice
- Open Market to foreign competition
The IMF advices economies to:
- Embrace globalisation
- Export led growth
- Embrace deregulation and privatisation
- Embrace budget balancing

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
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

Organisation for Economic Co-operation and Development (OECD)

The organisation for Economic Co-operation and Developments an
international economic organisation of 31 countries committed to
democracy and to the market 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 contributing to the development of the world
Influence of government economic forums (G20 G8)
Group of Eight Nations (G8/G7)
The group of eight (G8) largest industrialised nations include the US,
UK, France, German, Canada, Japan Italy and Russia along with the
European Union (it was previously now as G7 because Russia was not
The G8/G7 has effectively operated as the economic council of the
worlds wealthiest nations, meeting annually to discuss conditions in
the global economy
Because of the G8s status as the forum for the worlds most powerful
economies, its agenda has often included general political issues and
current priorities such as climate change, global poverty and security
Group of Twenty Nations (G20)
The G20 emerged as the leading council of nations responsible for the
management of the global economy
The meeting achieved agreement on measures to improve coordination
of fiscal stimulus being implemented by governments around he world,
as well as on a plan for improved supervision of the global financial
system and international financial institutions
The Toronto summit in 2010 focussed on balancing the need for a long
term place to reduce fiscal deficits while continuing to support global
economic recovery

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Trading blocs, monetary unions and free trade agreements
As trade has grown and economies have become more integrated countries
have in recent years moved to form agreements and trading alliances to
ensure that they are in the best position to gain from growing trade
opportunities and also to avoid being excluded from emerging trading blocs

There are two major types of trade agreements existing in the global
Preferential free trade agreements (which are regional or bilateral
Multilateral agreements (which are open to all nations)
A trading bloc occurs when a number of countries join together in a formal
preferential trading agreement to the exclusion of other countries, such as
European Union (EU) and the North American free trade Agreement (NAFTA)
Monetary union is where two or more countries share a common currency
Free trade agreements (or preferential trade agreements) are formal
agreements between countries designed to break down barriers to trade
between those nations. When the agreement is between two countries it is
said to be bilateral and when the agreement is between two countries it is
said to be bilateral and when the agreement is between three or more
economies it is said to be multilateral or regional. While these agreements
are generally described as free trade agreements because in effect they give
more favourable access to goods and services from one nation or a group of
nations compared to another. Sometimes they can make it harder for nations
outside the preferential trade agreement to trade at all. In contrast, global
free trade agreements, conducted through the World Trade Organisation
(WTO), are designed to break down all trade restrictions and free up world
Regional trade agreements have multiplied in recent decades, with the
number of agreements in force jumping from 27 agreements in 1990 to 278
in 2010. In fact, only one WTO member (magnolia) is not a party to a regional
or bilateral trade agreements in recent years had led to what some
economist have describe as the emergence of regionalisation, not
Evidence: around two0thirds of European trade occurs within the
European Union, demonstrating both its vast size and its tendency to
be a more closed trade bloc due to protectionist policies

Trade Agreements

Global agreements Multilateral or Regional Bilateral

agreements Agreements
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Advantages and disadvantages of multilateral (EU, APEC, NAFTA, ASEAN)
and bilateral agreements
Asia-Pacific Economic Cooperation (APEC) forum
Asian-pacific Economic Cooperation (APEC) forum was formed in
response to the formation of trading blocs around the world (EU,
Its member include: Australia, Brunel, Canada, Chile, Hong Kong ,
Indonesia, Japan Malaysia, Mexico, New Zealand, Pap New Gunnie,
Peru ,The Philippines, Russia, Singapore, South Korea, Taiwan,
Thailand, USA and Vietnam
The APEC forum is intended to be a free trade group that supports the
WTO and addresses all impediments to the objective of free and open
trade and investment in the region. It is intended to be non-
discriminatory group (not a secluded trading bloc like EU), in that it
will trade with countries outside of the grouping on the same basis of
members of the forum if they are prepared to give equal access to
their market
However, the APEC meetings has not succeeded in its origin ambition
to create a regional area of free trade, instead the APEC meetings
have increasingly served simply as an opportunity for leaders to meet
and address whatever issues were the priorities if the day (i.e.
financial crisis, climate change and terrorism)
APEC forums has 40% of the worlds population, 54% of world GDP
and 48% of world trade
The European Union
The European Union (EU) is the most important trade bloc in the world
economy. Its member span across the European continent, with
membership growing to 27 nations in 2007, giving it a pollution of
around 500 million people. Currently three additional countries
The EU is a single market for European goods and services was
established in 1992, and this has helped drive strong trade growth
within the EU. However, the EU has tended to raise tariff barriers
against non-member countries, resulting in accusations that the EU is
a closed trading bloc
The increase in protection has had major implications for non-
European countries (some large international traders, such as USA
and some relatively small as Australia)
In particular, the high rates of protection applied to agricultural
product in the EU (almost 40 precent of EUs budget of $A220 billion is
spent on agriculture) and the huge oversupply of agricultural

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commodities that this generated, has prompted a retaliation from the
USA with similar protection policies. This has left smaller agricultural
trading countries around the world , including Australia suffering in
this ongoing conflict
North American free Trade Agreement (NAFTA)
NAFTA was established in 1994 and is composed of United States,
Canada and Mexico
NAFTA is a free trade agreement in which agricultural protection is
being completely eliminated and other tariffs are being phased out
over a period of 5 15 years
NAFTA has resulted in substantial increase in trade among its
members. Access to the United States market has resulted in
significant increases in exports for the two other members, while the
US has benefited from shifting the production facilities to Mexico
where wage costs are substantially lower
Free Trade Area of the Americans (FTAA) is a potential trading bloc
between America

Bilateral trade agreements

A bilateral trade agreement occurs between two economies
- A good example of this is the Closer Economic Relations Trade
Agreement (CERTA) (between Australia and New Zealand)
CERTA has gradually been extended in recent years, such as with
the harmonisation of business regulations, and tax laws between
the two economies. This agreement has led to an 8% annual
increase in trade between Australia and New Zealand
Bilateral trade agreements have experienced a resurgence in recent

This resurgence is due to:

- Show progress of the WTO to create multilateral negotiations
- United States using its economic power to negotiate bilateral
agreements more favourable for itself
However, economist are divided over the extent to which bilateral
agreements claim OF delivering large increase in trade is not always
true. In fact, the cost of implementing these agreements are
underestimated and the benefits exaggerated

Association of South East Asian Nations (ASEAN)

The ASEAN group covers emerging economies in South East Asia
but doesnt include any f the large economies. ASEAN has acted as
a counter-weight to the APEC forum, which tends to be dominated
by large advanced economies such as US, Japan and China. ASEAN
is now the most important force for trade negotiations within the
Asia Pacific region.
The ASEAN Free Trade Area (AFTA) comprises of Indonesia, Thailand,
Malaysia, Singapore, The Philippines, Vietnam, Brunei, Burma,
Cambodia and Laos
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The ASEAN-Australia-New Zealand Free Trade Area (AANZFTA)
agreement came into effect in 2010, with ASEAN nations
committing to lowering and eliminating tariffs on 96% of Australian
exports to the region. This is the largest preferential trade
agreement that Australia has concluded representing 20% of
Australias trade in goods and services and covering economies
with a GDP of over $US 1 trillion

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

Reasons for Protection

- Despite the economic argument in favour of free trade, historically most
countries have tend to impose at least some form of protection to assist
local producers in the face of foreign competition. A number of arguments
have been put forward to justify why countries impose protectionist
barriers to trade, including the need to assist infant industries, protecting
industries from overseas firms dumping goods, reducing unemployment
and argument of self-sufficiency in certain times (war)
- Infant industries (major reason)
During establishment phase new industries generally face many
difficulties and risks. They usually start out on a small scale (have
not achieved economies of scale yet), with costs that are relatively
higher than those of the more established firms competing in the
international arena. It is argued that these infant industries may
need protection in the short run to enable them to expand their
scale and reduce their cost of production so that they can compete
with the rest of t the world
For this argument to be valid, the protection should be temporary,
otherwise there would be no real incentive for the industry to reach
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a level of efficiency that would enable it to compete with protection
and a good chance of achieve a comparative advantage in the long
- Prevention of dumping
Dumping occurs when foreign firms attempts to sell their goods in
another countrys market at un realistic prices
The practice of dumping may occur for two reasons:
- To dispose of large production surplus
- To establish a market position in another country
These low prices are usually only of a temporary nature but can
harm domestic producers, local firms that could normally compete
with such foreign producers may be forced out of business, causing
a loss in countrys productive capacity and higher unemployment
The only gain from dumping is that it results in lower prices for
consumers in the short term, but this does not last, as foreign
producers will put up their prices one the local competition is
eliminated. Under such circumstances, it is generally in the
economys best interest to impost restrictions on such imports
However in recent years the WTO has questioned whether countries
might be abusing their entitlement to prevent dumping and falsely
accusing efficient low-cost foreign producers (economies with
comparative advantage) of dumping as an excuse to give domestic
producers on artificial advantage

- Protection of domestic employment

One of the most popular arguments in favour of protection is that it
saves local jobs. If local producers are protected from competition
with cheaper foreign imports, the demand for local goods will be
greater and this will create more domestic employment
However, economists argue that protection will tend to distort the
allocation of resources in an economy away from areas of more
efficient production towards areas of less efficient production
(survival of the fittest)
In the long run, this is likely lead to higher levels of unemployment
and lower growth rates. On the other hand, by phasing out
protection it is hoped that better and more lasting jobs will be
created other sectors within the economy that are internationally
Furthermore, if a country protects its industries, it is possible that
other countries will retaliate and adopt similar protectionist polices.
The net result could be that country would maintain employment in
less efficient protected industries but lose employment in more
efficient export industries. Also, the increased cost of foreign
imposters worldwide results in higher prices for everyone as firms
aim to main profitability
- Defence and self-sufficiency
Majd Abdulwali |Economics Notes 16 |
Major superpowers generally want to retain their own
defence/weapons industries so that they are able to produce their
own defence equipment in periods of war regardless whether it is
cheaper to be produced overseas
Similar to defence, economies need to be self-sufficient in food
supplies (e.g. Japan)
- Other arguments
Economies need to protect their country from foreign goods that could
harm their environment
Methods of protection and effects of protectionist policies on the
domestic and global economy
- Methods of protection
- A tariff is a government imposed tax on imports. It has the effect
of raising the price of the imported goods, intending to making the
domestic producers more
- The diagram to the right reveals the
The curve SS and DD represents
domestic supply and demand
OP is the price of imported goods in
there was no tariffs applied (i.e. in a
situation of free trade). At this price
demand 0Q1, domestic producers supply
0Q, and the quality imported would be
If a tariff of PP1 is imposed, all of which
is passed on to consumers, demand will
contract to 0Q3, domestic supply will
expand to 0Q2, and imposts will fall to
Following the imposition of the tariff the
government will raise revenue of ABCD
- Economic effect of tariffs
Domestic producers supply a greater quantity of the good.
Therefore 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 (i.e. those who are unable to compete on a n equal
footing with foreign producers +
Consumers pay a higher price and receiver fewer goods, this
redistribution of income away from consumers to local producers
The tariff raise revenue for the government, but that is not the
primary objective. In fact, the more successful the tariff as a
protectionist device (the import it restricts) the less revenue it will
A retaliation effect can be experienced. In response to tariffs on
imports, other countries may impose tariffs on the goods that are
exported to them. In that case any increased production and

Majd Abdulwali |Economics Notes 17 |

employment gains got the import-competing industries would be
offset by losses in the nations export industries.
- 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 and DD represent
domestic supply and demand
0P is the price at which the imported
goods would sell if there was no quota
imposed. At this price consumers
demand 0Q1, domestic producers
supply 0Q1 and the quantity imported
would be QQ1
If the government imposed a quota
restring imports to Q2Q3, this would
have the effect of raising the price of
imported good to 0P1. This price would
allow domestic expand to 0Q2
Countries sometimes use a system of
tariff quotas. Under this protectionist
method, good s imported up to the quota
pay the standard tariff rate, whereas goods imported above the quota pay
a higher rate
- Economic effect of a quota
Domestic producers supply a greater quantity of the good.
Therefore, the quota stimulates domestic production and
employment in the protected industry
More resources in that economy will be attracted to the protected
industry , leading to a reallocation of resources from other sectors of
the economy (where production and employment will fall)
Consumers pay a higher price and receive fewer goods. This
redistribution away from consumers to domestic producers in the
protected industry, and results in lower overall levels of economic
Unlike tariffs, quotas do not directly generate revenue for the
government. However, governments can sometimes raise small
amount of revenue from quotas by administering the quota through
selling import licence allowing firms to import a limited number of
As with tariffs, the imposition of a quota on imports can invite
retaliation from the country whose exports may be reduces because
of the quota this can result in lower exports for the country that
initiated the import quota
- Subsidies are cash payments from the government to businesses to
encourage production of goods or services and influence the
allocation of resources in an economy to allow them to compete with
overseas competition
- 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

Majd Abdulwali |Economics Notes 18 |

S1S1, resulting in a lower
market price
Businesses will be able to
sell a higher quantity od
their product on bother
domestic and global
The quantity produced
increases from Q to Q1
The size of the subsidy in
per unit terms is the
vertical distance between S
and S1
- Economic effects of a subsidy
Domestic producers
supply a greater
quantity of the good. Therefore, the tariff stimulates domestic
production and employment in the protected industry
More resources in that economy is attracted to the protected
industry, leading to reallocation of resources from other sectors
of the economy (where production will fall)
Consumers pay a lower price and receive more goods, because
the subsidy shifts the supply curve from the sector to the right,
However , consumers still pay indirectly through higher taxes
Subsidies impose direct costs on government budget because
they involve payments from the government to the producers
of goods and services. This means that governments have
fewer resources to allocate to other priorities such as
healthcare and education (reallocation of income)
While economist are opposed to protectionist policies, they
often prefer a subsidy to tariff because subsidies tend to be
abolished more quickly (since they impose costs on the budget,
rather than generating revenue)
Local content rules
- Local content rules specify that goods must contain a minimum
percentage of locally made parts. In return for guaranteeing that a
contain percentage of a good will be locally made, the imported
component may not attract a tariff.(e.g. Australian television is
protected by local content restrictions to maintain Australian culture)
Export incentives
- Export incentive programs give domestic producers assistance such
as grants, loans or technical advice (such as marketing or legal
information), and encourage businesses to penetrate global markets
or expand their market share

- Overall Economic effect of protectionism on global economy

Global protectionist policies have the overall effect of reducing trade
between nations (Global protectionist policies cost global economies
between US$180 billion and US$20 billion in exports yearly according to the

Majd Abdulwali |Economics Notes 19 |

Overall, protectionist policies reduce living standards and reduce global
economic growth by shielding inefficient producers ( the international
institution for international economics estimates that protectionism reduces
GWP by US$400 billion yearly)
Protectionist policies make it more difficult for individual economies to
specialise in production in which they are most efficient. Businesses are less
likely to achieve economies of scale and therefore lower profits and lower
dividend. With less completive pressure, prices of goods and series in
individual economies are higher
The negative economic impact of the protectionist policies of trading bloc
tends to be greatest for developing economies, which are excluded from
accessing advanced economies markets

Majd Abdulwali |Economics Notes 20 |

Globalization and economic development
The most distributing feature of the global economy is the significant difference in the
standard of the living between countries and stark inequality of income

While there is a large gap between rich and poor countries, it is also true that in
overall terms, living standards are improving in most countries rich and poor. This
evidence by the following facts:

- 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

Difference between economic growth and economic development

Economic growth occurs when there is a measure of welfare in a nation
that includes indicators of health, education and environmental quality as
well as material living standards
Economic development is a broad measure of welfare in a nation that
includes indicators of health, education and environmental quality as well
as material living standards
Distribution of income and wealth
High income economies receive around two-thirds of the worlds
income as measured in raw GNI figures or over half o the worlds
income using PPP-adjusted GNI figures
While the richest nations are far better off than poorer countries, the
gap appears to be falling, though very slowly.
Technological change has shifted production process away from low-
skilled labour towards higher skilled labour. This benefits people with
higher levels of education by increases unemployment for less
skilled workers (division of labour)
Another dimension to global inequality is the unequal distribution of
global wealth
According to United Nations University, global wealth is
concentrated among households in North America (34% of global
Majd Abdulwali |Economics Notes 21 |
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

Income and quality of life indicators

Economic growth
Gross National Income
The most popular method of comparing living standards
between economies is income, because it is a measure of the
ability of a nations citizens to satisfy their material wants
GNI is the sum of value added by all resident producers in an
economy plus receipts of primary income for foreign sources
One of the limitations in making such comparisons between
the size of economies Is the exchange rate used to make the
comparisons.(for example, if the price of a good or service in
developing countries is low relative to the price in the United
States, them measuring GNI in terms of US dollar will
underestimate the true income of the developing countries, is
how far your dollar goes)
For this reason, economists usually make an adjustment using
what is known as Purchasing Power Parity (PPP). This
theory states that exchange rates should adjust to equalise
the price of identical goods and services in different
economies throughout the world
Given that the high-income economies have just over one
billion people out of a world population of almost seven billion,
a high level of inequality clearly exists in the low-income
economies receive an economic output that is only a fraction
of the output of the high-income economies
People who live in the developing world (one in six people in
the world) enjoy income levels that, even after adjusting for
purchasing power parity, are six times as great as those in low
and middle income countries.
While the richest nations are far better off than poorer
countries, the gap appears to be falling, though very slowly.
Almost all nations have experienced some economic growth in
recent decades, enjoying higher income as a result of an
income increase as in their Gross Domestic Product (GDP). For
the rich nations, wealth is needed to create more wealth
Another dimension to global inequality is the unequal
distribution of global wealth. Wealth is an important safety net
for people when they do not have income and can be used to

Majd Abdulwali |Economics Notes 22 |

start a businesses and generate income (wealth creates more
Evidence: according to 2008 research by economist at
the United Nations University Global Wealth is
concentrated among household in North America (34%),
Europe (30%) and rich Asia-Pacific countries like Japan
and Australia (24%), with the remaining countries across
Latin America, Africa, Asia (China & India). Sharing only a
little over 10% of the worlds economic wealth. Hence
wealth is distributed even more unevenly than income
Economic growth refers to an increase in an economys
income and production
GNI and economic growth and income cannot measure living
standards accurately
Economic development
Economic development also takes into account other quality of life
indicators such as health standards, education levels, and domestic
work that is not given a financial value, the level of damage to the
level of damage to the environment and inequalities income
Human development index (HDI)
The main alternative measure to GNI is the HDI, devised by
the Uniter\d Nations Development Program (UNDP) to
measure economic development
HDI takes into account:
Life expectancy at birth (health and nutrition standards in
a country)
Levels of education attainment (education levels = future
development potential)
Gross Nation Income per capita (income of domestic
producers + foreign sources by PPP)
The HDI (Admeasured of economic development in an
economy from 0 to 1)
Comparing HDI and GDP statistics reveal the difference
between economic growth and development across the globe,
Highlighting the Importance of a broader measure of welfare
Economic development relies on economic growth but not the
other way around
Developing economies, emerging economies, advanced economies
Categories of development in the global economy
Advanced economies (industrialised/developed)
- These are countries that have high levels of economic
- Have close ties with each other (i.e. OECD)
- Have liberal-democratic political/economic institutions

Majd Abdulwali |Economics Notes 23 |

The IMF identifies 34 advanced economies, that make up half of
the high income economies in the world (the other hand have very
small nations) and comprises most of the members of OECD
- High income economies have Gross National Income per capita
levels above $US 12 246 and arte mostly found in North America
and Western Europe, with a smaller number in the Asia-Pacific
Emerging economies
- These are economies that are in the process of industrialisation or
modernisation and are experiencing sustainably high levels of
economic growth
- This classification includes a range of economies that are nether high
income, nor share the traditional characteristics of developing
- They include the economies that used to be known as newly
industrialised economies (i.e. Malaysia and the Philippines)
- They include economies that used to be known as transition
economies which were making the transition from social economies
(i.e. China & Hungary)
- They include developing economies with improved prospect (i.e. India
& Indonesia)
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
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

Majd Abdulwali |Economics Notes 24 |

- 33/48 LDCs are located in Sub-Sahara Africa (Africanisation of

Types of Income levels Economic Structure of Examples

Economy Growth economy
Advanced High income Slower growth Large service United States
levels, with GNI in recent industries and Germany
per capita above decades advanced Korea
$US 12,276 manufacturing
Developing Low income Moderate Heavily reliant Bangladesh
levels, with growth rates, on agriculture Zimbabwe
around half of but population and foreign aid Ethiopia
population in growth also
absolute poverty high
Emerging Income levels vary Strongest Industrialising , China
but what these growth rates usually with Brazil
economies have in in the world (5 substantial Indonesia
common is fast 10 per cent) manufacturing
growth in income and sectors
levels favourable Copyright 2013 | Majd
Reasons for differences between nations (cause of global inequality)
Global factors:
Global trade system
- Wealthy countries protect their domestic agricultural sector
because it is not competitive with agricultural producers in
many developing nations. Developing countries that export
commodes are severely affected by continued high levels of
local protectionism in the agricultural sector (OECD nations
provide $US253 billion in agricultural protection)
- Expanding regional trading blocs like EU and NAFTA exclude
poorer nations from gaining access to lucrative (highly
profitable) global consumer markets
- WTO negotiations that focus on improving development in
poorer nations seem to always tell short on providing any
actual benefits to developing countries because of the
resilience of high income nations
- The benefits of free trade agreements are often not accessible
to developing nations because of the substantial cost in
implementing international agreements and lodging against
other countries protectionist measures. A one percent increase
in administrative costs would result in a decrease in GDP by
$US 75 billion

Global financial architecture

- Historically, long term International flows heavily favoured
developed countries. That has changed in recent years, with
developed economies now accounting for only hand of global
FDA inflow. However, FDI flows now mainly benefit a handful of
Majd Abdulwali |Economics Notes 25 |
emerging economies includes China, Brazil, India and Russia. In
2010 the Worlds 48 least developed economies, by contrast
received only 2 precent of global FDI inflows
- Short term financial inflows s favour the more prosperous
emerging economies, which offer better financial return for
currency and stock market spectators. However, these regions
have also experienced greater economic volatility (i.e. East
Asia Crisis)
- The major criticism of the IMF is that the structural
adjustment policies it advocates serve the interest of rich
countries, and may not be appropriate to the conditions of
many developing countries
- Many developing countries have massive foreign debt burdens.
As a result, many developing countries spend more on debt
servicing that public healthcare, education and infrastructure
which could promote growth and development. The existence
of debt can also precent potential investors
Global aid and assistance
- The total level of developing aid provided by high-income
economies was $US133 billion or 0.31% of GDP in 2011. This is
less than half the level of which high income economies have
been committed for four decides (0.7 % of GDP)
- Critics of aid policies argue that a significant portion of official
development assistance is Phantom aid (which is temporary
aid that does not improve the lives of poor). Additionally,
another proportion of aid is tied aid (which is conditional aid
that must be spent on overpriced or unnecessary goods and
services that are produced by the donor country (America
assisting Africa with its own crops)
- The distribution of aid by high-income countries often reflects
strat4gic and military considerations rather than the needs of
the poorest nations (America assisting Iraq & Afghanistan after
war rather the LDCs)
Global technology flows
- Recent World Bank research found that around half of the
difference in living standards between US and developing
economies can be linked to the slow adoption of new
technologies in poorer nations. Differences in access to new
communications technologies is called the digital divide
- New technologies are also largely geared to the needs of high-
income countries because they choose the priority areas of
scientific research (e.g. labour saving devices) and have little
benefit to poorer nations
- Developing nations also find it difficult to gain access to new
technologies intellectual property rights restricts the benefits of
technological transfer to poorer countries because they cannot
py developed country prices for those technologies

Majd Abdulwali |Economics Notes 26 |

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
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

Majd Abdulwali |Economics Notes 27 |

economic growth. Courtiers with the highest levels of human
development, such as investment in human development
Government response to globalisation
- Policies relating to trade, financial flows, investment flows,
transnational corporations and the countrys participation in
regional and global economic organisations will influence on
economys ability to take advantage of the benefits of
integration, such as economic restructuring, efficient, access to
foreign capital and technology and access to overseas goods

Effects of globalization (impact of globalisation)

Economic growth and development
Developing economies have greater opportunities to grow by
producing goods for global consumer market, and can also benefit
from greater access to new technologies and foreign investment
On the other hand, some regions have not gained as much as might
be expected from globalisation and greater economic integration has
cause disruptive structural change in some regions
Overall, there is no clear evidence that globalisation has produced an
acceleration of economic growth. As the world economy has become
more integrated over recent decades, world growth slowed from
3.3% per year (1990s) to 2.8% (1990s) and to 2.7% (2001-2011)
However, globalisation does nevertheless appear to be contributing
to a convergence in living standards in the global economy. In recent
decades, the fastest growing economies have been emerging
economies such as China and India, while the slowest growing
economies have been the advance economies. Since 1990, emerging
and developing economies have been catching up to advance
- The East-Asia and Pacific region has been the fastest growing
region in the world (8.7% per year, on average, between 1991
and 2011). In particular, strong growth in China during this period
(10.4%) demonstrates the role of industrialisation and
globalisation in economic growth
- Economies in South Asia have also experienced successful growth
over this period (6.1%), in particular India after becoming more
integrated in the global economy (6.5%) as well as Bangladesh
- Latin American economies (3.4%) such as Brazil and Argentina
experience stronger growth than in 1980s (1.4%) due to greater
integration with regional economies as well as rising commodity
- High income economies grew by just 2.1% on average in the
1991-2011 period, slower than the 3.3 % recorded during the

Majd Abdulwali |Economics Notes 28 |

The implications of these trends are mixed. On one hand, the
remarkable growth experienced by emerging and developing
economies that have embraced international trade, foreign
investment and the participation of translation corporations may
indicate that globalisation facilitates higher rates of economic
growth. For example, sustainable economic growth in China and India
is liked to policies in both countries that have encouraged increase
trade and foreign investments
On the other hand, the most globally integrated economies,
advanced economies, experienced comparatively weak growth over
the past two decades and were most impacted by the global
recession of the late 2000s. In particular, economies with highly
globalised financial markets, such as United States and Europe,
suffered the worst effect of global recession and were again the
centre of economic instability in 2012. Global forces have also
contributed negatively to other growth outcomes in recent years,
such as through foreign indebtedness (Africa) and exchange rate
volatility (Latin America & East Asia crisis). Therefore, while certain
features of globalisation clearly facilitate economic growth, other
features may destabilise or constrain economic growth
If globalisation lifts economic growth rates in individual economies it
also raises income levels, and provides more resources for education
and health care, and for programs to clean up the natural
However economic growth has negative consequences for
development if, while contributing to growth in individual countries, it
also caused income inequality to increase and accelerate climate
change and environmental damage.
In analysing the trends of recent decades, it is clear that the impacts
of globalisation are dominated by the rising economic power of
China, since China has the worlds largest population. The rise of
China is a major structural change in the global economy that is
occurring in parallel to the process of globalisation. There is no
question that globalisation has also contributed to the extraordinarily
speed of Chinas economic development. Trade has been central to
Chinas rapid industrialisation since Chinas growth has been led by
export-oriented manufacturing industries. Chinas growth is also in
turn accelerating the process of globalisation, by deepening trade
and financial links among economies
The speed and scale of Chinas economic expansion dwarf any other
emerging economy and so in examining the impact globalisation is
important to examine particularly the role of China
Trends in the Human Development Index (which is a measure of
material living standards, education and health outcomes), shows
that over long periods of time (1980-2011) almost all countries have
experience major improvements in economic development

Majd Abdulwali |Economics Notes 29 |

The role of financial markets
Global financial markets can have positive impacts on economies.
Countries would be unable to conduct international transactions
without foreign exchange market. Businesses would find It more
difficult to access loans or a attract investors if they were confided so
domestic financial market. Efficient international financial markets
should encourage greater transparency of the action of businesses
and governments and should foster economic development
However, global financial markets have also produced negative
results during the globalisation era. Financial markets shift massive
volumes of money around the world every day. If investors
sentiment turns against a particular economy, it can result in a
collapse in exchange rates, a shock to the economy and a recession
accompany by rising unemployment. This was seen in Mexico in
1995, in East Asia in 1997 (East Asia crisis), in Russia in 198, in Brazil
in 1999, and in Argentina in 2002
With its origin in the United States housing market, the global
financial crisis of 2008 saw a collapse in worldwide investor
confidence and the seizure of the global financial system. Central
banks subsequently flooded financial markets with liquidity,
governments guaranteed banking deposits to improve confidence
and many governments provided bail-out to prevent troubled banks
and financial institutions from collapsing. While these emergency
measures helped avoid global economic depression, the world
economy sill contracted by 2%
Income inequality
Globalisation Also has impacted on income inequalities within
countries because as trade and financial flows grow, it changes the
structure of economies
Increased openness to trade provides more export
opportunities, which raises the income of agricultural workers
in developing countries. Lower tariff or imports improve
standards of living for the poor by reducing the price of goods
Increase financial flows provide greater employment
opportunities and fuel economic growth, but FDI flows also
tend to be concentrated in high skilled and high technology
sector favouring those who are already better off
According to IMF, one fifth of the increase in income
inequality seen in countries is because of globalisation
Trade, investment and transnational corporations
Globalisation has resulted in substantial increases in the size of trade flows
and foreign investment. Because of the key role played by transitional
corporations (TNCs) in both trade and investment flows, TNCs are
increasingly dominating business activity around the world

Majd Abdulwali |Economics Notes 30 |

An important feature of trade growth during the globalisation era is how
goods are produced in different stages in different economies, this is
known as vertical specification (global supply chain)
The globalisation of financial markets has seen an increased reliance on
foreign sources of finance for investment. Foreign direct investment is now
playing a greater role in creating more economic activity for every region
around the world
The Growth of short term financial flows has created great volatility, it in
many economies
Merge activities continues to concentrate the number of the companies, as
TNCs prepare for a world where many global industries will feature just a
handful of global companies
Environmental sustainability
Low income countries that are desperate to attract foreign investment and
earn higher export revenue may engage in economic behaviour that
harms the environment (disposal of production waste)
Additionally, the growth in global trade itself is increasing consumption of
non-reliable fuels for transport by air, road, rail and sea vehicles
On the other hand, globalisation also affects the best opportunity to
protect the worlds environment from harm by forcing individual nations to
face up to their global responsibility for environmental preservation. It
makes it possible for the cost of preservation to be shared, and to increase
scrutiny of the environmental practices of transitional corporations.
Globalisation has also facilitated the transfer of environmental friendly
technology. Overtime, globalisation may create international institutions
with the power to enforce orders on individual countries to stop
environmental damage

The international business cycle

The closer linkage between economies hold benefits and risks fro
countries in the global economy. The benefit of integration is that it allows
countries to achieve faster rates of economic growth by specialising in
certain types of production and by engaging in trade. Countries that have
a higher level of trade also experience faster economic growth. In
particular, during ties when world economic growth in higher, individual
economies are likely to benefit from the upturn in growth
However, closer economic integration also makes economies more
exposed to downturns in the international business cycle and to
developments in their regions. One of the reasons for the strength of
global economic growth in the mid-2000s was the simultaneous upswings
in the US and China which propelled the global economy to its fastest
growth rate in 30 years. Equally, the closer the links between economies
resulted in the downturn in the US economy in the late 200s spreading
quickly to other developed and developing economies
Nevertheless, as the extent of trade and financial integration continues to
increase , there is a likely to be greater synchronisation of the

Majd Abdulwali |Economics Notes 31 |

international business cycle, intensifying both the downturns and upturns
in the global economy

Copyright 2013 | Majd


Majd Abdulwali |Economics Notes 32 |