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Globalisation:
The increased integration between different countries and economies and the increased
impact of international influences on all aspects of life and economic activity.
Global economies are more integrated now - result of technological improvements and
resources.
Trade in G&S:
● Measure of how G&S produced in an economy are consumed in other economies
around the world.
● Grown rapidly in recent years; from 37% of global output to 50%.
● Annual growth in trade is generally 2x the level of economic growth. High volume of
trade
● Growth in trade volume shows that economies don’t produce all items they need or
as efficiently as other economies
● Also grown due to new technologies in transport and communications - reduced
costs
● Composition of trade can have impact on individual economies - movement from
manufactured goods to services
● Direction of trade flows changed - reflection of changing importance of different
economic regions
Financial flows
FOREX: markets which are a network of buyers and sellers exchanging currency to facilitate
financial flows between countries
International Monetary Fund (IMF): international agency - 189 members - oversees the
stability of Global financial systems. Major function is to ensure stability of exchange rates,
exchange rate adjustment and convertibility.
Transnational Corporations (TNCs): global companies that dominate global product and
factor markets. They have production facilities in at least two countries and are owned by
residents of at least two countries.
International division of labour: how the tasks in the production process are allocated to
different people in different countries
Global supply chain: when producers have production facilities in several countries
Gross domestic product (GDP): total market value of all final G&S produced in an
economy over a period of time
International business cycle: refers to the fluctuations in the level of economic activity in
the global economy over time.
Comparative advantage:
The economic principle that nations should specialise in the areas of production in which
they have the lowest opportunity cost and trade with other nations so as to maximise both
nations’ standards of living. Developed by David Ricardo in 1817.
Absolute advantage:
Developed by Adam Smith in his 1776 publication ‘The Wealth of Nations’. Absolute
advantage is where a country, with a given amount of resources can produce more output
than another country with the same level of resources.
Opportunity cost:
Represents the alternative use of resources. Often referred to as the “real” cost, it represents
the cost of satisfying one want over an alternative want. This is known as the economic cost.
Advantages of free trade:
● Allows countries to obtain G&S that they cannot produce themselves or in sufficient
quantity to satisfy domestic demand - lack of adequate resources
● Allows countries to specialise in production of G&S in which they are most efficient -
better resource allocation and increased production
● Encourages efficient allocation of resources
● More specialisation - leads to economies of scale - lower costs of production
● International competitiveness improves
● Encourages innovation, spread of technology and processes
● Leads to higher living standards (result of lower prices and higher efficiency,
increased consumer choice)
● Formed in 1995
● Prior to WTO responsibility for developing trade agreements was with General
Agreement on Tariffs and Trade (GATT) (1947) - weakness was that there was no
effective way to enforce the trade agreements
● Main aims:
○ Liberalisation of trade
○ Non-discrimination
○ No unfair encouragement for exports
● It deals with trade in goods, services and intellectual property rights
● A process of dispute resolution is commenced - no solution = WTO panel
● Its efforts to conclude a comprehensive global trade agreement have been
unsuccessful
● However, general levels of protection have decreased
● Has managed to reduce domestic production subsidies in agriculture, decreased
pirating and created open services markets
○ Doha Rounds wanted to reduce agricultural protection, lower tariffs on
manufactured G&S and reduce restrictions on trade - failed due to disputes
between developed and developing economies
● 164 member countries and 23 countries negotiating to join
World Bank:
role in the global economy is primarily concerned with helping poorer countries with their
economic development
● Goals:
○ Reduce extreme poverty to less than 3% by 2030
○ Reduce inequality by fostering income growth for world’s bottom 40%
● Internal organisations:
○ International Development Association: provides “soft loans” (loans at little to
no interest for developing countries)
○ International Finance Corporation: attract private sector investment to Bank’s
projects
○ Multilateral Insurance Guarantee Agency: provides risk insurance to private
investors
○ International Centre for Settlement of Investment Disputes: conciliation and
arbitration of investment disputes between states, and corporations
● Funded by contributions by member countries and its own borrowings
G20:
● 19 of world’s largest economies and EU
● 80% of world GDP and ⅔ of the world’s population
● Has annual summit
● Emerged as leading forum during GFC to avoid depression:
○ Agreed to coordinate fiscal stimulus
○ Improve supervision of global financial system and international financial
institutions
G7:
● Formed in 1976
● Group of 7 largest industrialised nations - US, UK, France, Germany, Canada, Japan,
Italy
● Effectively operates as economic council of world’s wealthiest nations
● Unofficial forum coordinating macroeconomic policies
● Includes political issues and priorities such as climate change, poverty and security
● Significance has shrunk due to:
○ Power being shifted to China
○ Nationalistic posture of US
G8:
● Group of 8 largest industrialised nations - US, UK, France, Germany, Canada, Japan,
Italy, Russia
● Annual meeting
● Russia left G8
Monetary union: a group of economies with no restrictions on financial flows between their
economies
Free trade agreements: formal agreements between countries designed to break down
barriers to trade between those nations.
● They are called ‘free’ trade agreements - more accurate to call them preferential
because they give favourable access to goods and services to certain nations
● Free trade agreements through the WTO are designed to remove these barriers
Trade Agreements:
Protection:
Dumping: practice of exporting goods to a country at a significantly lower price than their
selling price in their country of origin
Prevention of dumping:
● May be used to dispose production surpluses or establish market position in another
country
● Usually temporary but harm domestic producers - may be forced out of business -
lower productive capacity - higher unemployment
● Only benefit - lower prices for consumers in short term
Environmental factors:
● Sometimes block trade in goods because of environmental factors
● Overseas producers don’t comply with same environmental standards that apply in
advanced economies.
Methods of protection:
Tariffs:
Taxes on imported goods imposed for the purpose of protecting
Australian industries.
Quotas:
Restrictions on the volume of a good that is allowed to be
imported over a given period of time.
Subsidies:
Cash payments from governments to businesses to
encourage production of a G or S and influence allocation of
resources in an economy.
Export incentives:
Give domestic producers assistance through grants, loans or technical advice and
encourage businesses to penetrate global markets or expand their market share.
● Popularity of this protectionist technique has grown because it doesn’t directly affect
domestic production and efficiency
● Doesn’t protect businesses from foreign competition
● Artificial barrier to free trade
Economic growth:
Quantitative measure of the increase in real GDP over a period of time. A rise in economic
growth indicates an increase of the nation’s economic capacity.
● Refers to higher national input - quantitative measure
● Looks at amount that output has changed, rather than looking at effects of the growth
● Often looked at through GDP or real GDP
● GDP has increased = economic growth (the country has produced more G&S and its
productive capacity has expanded)
Economic development:
Process whereby there is a sustained increase in the living standards of a country. Is
indicated by improvements such as education and health.
● High income countries receive around ⅔ of world’s income - half of world’s income
using PPP adjusted GNI figures
● High level of inequality - high income economies only make up over 1 billion of
population
● Low income economies = 10% of global population but <1% of global economy size
● GNI per capita shows people in high income figures enjoy income that is 5x larger
than those in low and middle income countries
● 1% of population owns more than half of the world’s wealth
● In short term:
○ Inequality is beneficial to wealthy, advanced economies as their companies
don’t face serious competition
○ Competitive industries cannot develop due to inadequate domestic base of
investment capital
○ Many countries remain dependent on foreign aid
● In long term:
○ Negative consequences for entire world
○ If developing countries become more competitive - lower prices - higher
quality
○ If they become viable producers there will be more efficient allocation of
resources
○ Less inequality is beneficial for entire world growth
● Difficult because so many factors and statistics can affect the standard of living
● Life expectancy, infant mortality, child malnutrition, poverty.
Emerging economies:
Are in process of industrialisation or modernisation and experiencing sustained high levels of
economic growth.
Advanced economies:
Countries that have high levels of economic development, close economic ties with
eachother and liberal-democratic political/economic institutions.
Developing economies:
Generally have low income levels per capita, human resources and health outcomes. Only
experience industrialisation to an extent.
Low growth:
● Remain poor
● No improvement in living standards
● Social and political problems
● Ineffective domestic policies
● Inequality in natural allocation
Global factors:
Economic resources:
Capital:
Having access to funds necessary for production.
Labour economies:
Refers to workers in a country. Amount of workers and quality of labour supply are
important. Can both be improved by government policies:
● Quantity: major role in determining what kind of production economy will specialise
in. Government has limited ability to affect quantity of workers, can provide incentive
to join labour force.
● Quality: refers to attribute if workers skill, education and qualifications. High income
countries tend to have highly educated and skilled labour resources.
Entrepreneurial culture:
Entrepreneurial abilities of the workforce or willingness of workers to take risks. Also refers to
management abilities in firms.
Natural resources
Countries with large supply of natural resources like oil, coal and other minerals will naturally
have a large mining or oil sector.
● Can boost economic growth because they are highly demanded globally.
● Having extensive reserves if natural resources doesn’t guarantee a country will be
developed or wealthy.
● A large amount of capital is usually needed to develop these resources. A country
may not have the means to exploit these resources.
Institutional factors:
Economic policies:
Use regulations and protectionist policies to influence what kinds of products are being made
by firms in the country.
● In centrally planned - more gov’t control
● Can use macroeconomic policies (gov’t spending and taxation, interest rates) affect
economic activity
● Microeconomic policies can increase efficiency and boost an economy’s productive
capacity
● Strategies for growth:
○ Improve natural endowments (CLEN)
○ Improve international competitiveness with macroeconomic policies and
targeting low inflation
○ Improve international competitiveness through microeconomic reforms
○ Increase the country’s access to trade
Effects of globalisation:
Globalisation has affected a range of economic and quality of life outcomes in individual
economies, fundamentally alters the way individual economies and global economy operate,
Impact is summarised by international convergence.
Strong focus on financial deregulation, floating exchange rates, free trade and inflation
targeting. Emphasis has been on reducing government involvement in the market.
Advantages Disadvantages
● Emerging economies
○ Benefited greatly
○ Political and economic capabilities to engage with world economy
○ China - improved literacy and HDI
● Advanced economies
○ Main beneficiaries of globalisation and grown strongly
○ Well developed before globalisation
○ Healthy, well educated workforce is necessary to take advantage of
globalisation
○ Australia - life expectancy rose significantly
● Developing economies
○ Situation now is not much better than 20-30 years ago
○ Average life expectancy in Swaziland was 40 in 1970 and 32 in 2009
○ Sub-Saharan Africa suffers badly from health problems
○ Globalisation has failed to help them - they haven’t been able to engage with
world economy due to political and economic turmoil
● Inflation:
○ Increased competition = lower market price
○ Consumers have access to cheaper imports, reducing imported inflation
Environmental sustainability:
● Low income countries can deplete resources to attract foreign investment and
increase exports
● Growth in global trade - increase in consumption of non-renewable resources
● Paris conference - 200 countries agreed
● Globalisation has also facilitated transfer of new technologies to improve energy
efficiency
Unequal distribution of income and wealth is one of most worrying effects of globalisation
● In short term:
○ Inequality is beneficial to wealthy, advanced economies as their companies
don’t face serious competition
○ Competitive industries cannot develop due to inadequate domestic base of
investment capital
○ Many countries remain dependent on foreign aid
● In long term:
○ Negative consequences from entire world
○ If developing countries become more competitive - lower prices - higher
quality
○ If they become viable producers there will be more efficient allocation of
resources
○ Less inequality is beneficial for entire world growth
● Difficult because so many factors and statistics can affect the standard of living
● Life expectancy, infant mortality, child malnutrition, poverty.
Emerging economies:
Are in process of industrialisation or modernisation and experiencing sustained high levels of
economic growth.
Advanced economies:
Countries that have high levels of economic development, close economic ties with
eachother and liberal-democratic political/economic institutions.
Developing economies:
Generally have low income levels per capita, human resources and health outcomes. Only
experience industrialisation to an extent.
Capital:
Having access to funds necessary for production.
Labour economies:
Refers to workers in a country. Amount of workers and quality of labour supply are
important. Can both be improved by government policies:
● Quantity: major role in determining what kind of production economy will specialise
in. Government has limited ability to affect quantity of workers, can provide incentive
to join labour force.
● Quality: refers to attribute if workers skill, education and qualifications. High income
countries tend to have highly educated and skilled labour resources.
Entrepreneurial culture:
Entrepreneurial abilities of the workforce or willingness of workers to take risks. Also refers to
management abilities in firms.
Natural resources
Countries with large supply of natural resources like oil, coal and other minerals will naturally
have a large mining or oil sector.
● Can boost economic growth because they are highly demanded globally.
● Having extensive reserves of natural resources doesn’t guarantee a country will be
developed or wealthy.
● A large amount of capital is usually needed to develop these resources. A country
may not have the means to exploit these resources.
Institutional factors:
Economic policies:
Use regulations and protectionist policies to influence what kinds of products are being made
by firms in the country.
● In centrally planned - more gov’t control
● Can use macroeconomic policies (gov’t spending and taxation, interest rates) affect
economic activity
● Microeconomic policies can increase efficiency and boost an economy’s productive
capacity
● Strategies for growth:
○ Improve natural endowments (CLEN)
○ Improve international competitiveness with macroeconomic policies and
targeting low inflation
○ Improve international competitiveness through microeconomic reforms
○ Increase the country’s access to trade
Effects of globalisation:
Globalisation has affected a range of economic and quality of life outcomes in individual
economies, fundamentally alters the way individual economies and global economy operate,
Impact is summarised by international convergence.
Strong focus on financial deregulation, floating exchange rates, free trade and inflation
targeting. Emphasis has been on reducing government involvement in the market.
Advantages Disadvantages
● Emerging economies
○ Benefited greatly
○ Political and economic capabilities to engage with world economy
○ China - improved literacy and HDI
● Advanced economies
○ Main beneficiaries of globalisation and grown strongly
○ Well developed before globalisation
○ Healthy, well educated workforce is necessary to take advantage of
globalisation
○ Australia - life expectancy rose significantly
● Developing economies
○ Situation now is not much better than 20-30 years ago
○ Average life expectancy in Swaziland was 40 in 1970 and 32 in 2009
○ Sub-Saharan Africa suffers badly from health problems
○ Globalisation has failed to help them - they haven’t been able to engage with
world economy due to political and economic turmoil
● Inflation:
○ Increased competition = lower market price
○ Consumers have access to cheaper imports, reducing imported inflation
Environmental sustainability:
● Low income countries can deplete resources to attract foreign investment and
increase exports
● Growth in global trade - increase in consumption of non-renewable resources
● Paris conference - 200 countries agreed
● Globalisation has also facilitated transfer of new technologies to improve energy
efficiency