The global economy

International economic integration

The global economy
o The sum of the interactions of individual economies that are now increasingly linked to each
other in one economic unit and changes in an economy have ripple effects on the rest of the
world
o Global economic growth in 2013-2014 was 3.4% - projected for 2015 to be 3.3% 2016 – 3.8%
o Gradual pickup of growth in advanced economies compared to a slower growth in
emerging/developing countries

Gross World Product (GWP)

o The aggregate of g&s produced worldwide in a specified period of time.
o In terms of GDP, the USA contributes the most to global growth whereas in terms of
Purchasing Parity Power China contributes the most to global growth
o Advanced economies contribute 49.6% of world GDP whereas emerging and developing
contribute 50.4% of GDP

Globalisation
o Refers to the process of increased integration between different countries and economies
and the increased impact of international influences on all aspects of life and economic
activity. Major indicators & Drivers of globalisation include:

Trade in goods and services

o Has increased, reduction of trade barriers like tariffs etc. and joining trade groups like the
WTO has increased the volume of trade
o Technological advances in transport and communication has lowered costs
o Composition of trade: dominated by manufactured goods (56.3%) in 2014
o Direction of trade has changed from high income countries (1995 – 82% to 69.9% in 2014) to
emerging countries like China, Indonesia, Vietnam (1995 – 7% to 2014 – 17%)

International financial flows

o Fastest growing indicator of globalisation, made possible by financial deregulation,

technology, overseas investment in share markets, increase in loans, access to funds to
finance investments.
o Speculators (investors seeking to make short term profits) are the main drivers of global
financial flows – 95% of transactions can result in volatile exchange rates seen in the GFC
2008

Investment and transnational corporations

o Growth in portfolio investments – short term buying and selling shares and direct
investment – long term injections to establish new businesses or purchasing existing
business
o In the 1990s to 2000s, the destination favoured developed countries (USA, Europe, Japan)
o 2012: favoured developing countries e.g. China, India, Brazil and Mexico (2014 – record of
59% of foreign direct investment)
o Foreign direct investment flows and trade are driven by transnational corporations, who
have production facilities around the world e.g. apple, Toyota

Technology, Transport and Communication

o Technology is the driver of globalisation in many ways. For example:

o Cheaper and more reliable communication through high speed broadband allows for
the provision of commercial services to customers around the world
o Development in cargo and freight technology speeds up trade
o In finance and investment – technology plays a key role in facilitating globalisation
through the powerful computer & communication networks which move money
around the world
o Modern TNCs could not function without the communictions technology of
international mobile & broadband
o Social media is accelerating globalisation, used for marketing
o Economies that take on new technologies tend to be more integrated with other economies
o Technologies include – internet, computing, high speed rail, email, online banking, cargo
ships, mobiles, containerisation, international telephony, aircraft cargo
o Recent innovations in technology have increased exports and trade opportunities for
particular countries. USA – huge software involvement, receives 55% of royalties and licence
fees from technology exports
o The internet has increased international business and investment and resulted in reduced
costs for businesses. As innovation is an ongoing process

International division of labour, migration

o An increased number of workers are moving to other countries for career opportunities –
3% of people work outside their country of birth. This shift is concentrated at either:
o Top end – highly skilled attracted towards richest economies – USA, West Europe.
Has resulted in the brain drain from Australia and New Zealand. 70% of the world’s
migrants live in high income countries
o Bottom end – Low skilled, cheap labour, attracted towards the richest countries to
do jobs that their population won’t do.
o These trends in migration reflect the new international division of labour where people
move to countries where their skills are in high demand
o There are still barriers restricting the movements of labour – immigration restrictions,
language, incompatible education qualifications
o Companies have also begun to shift production offshore in search of cheap labour e.g. US
companies have shifted production to Mexico. Since the formation of NAFTA in 1994, labour
costs have reduced to 20% of the previous level
o The international division of labour reflects the economic concept of comparative advantage
 Trade, financial flows and foreign investment
The bases of free trade – its advantages and disadvantages
Advantages

o Obtain goods otherwise unattainable

o Economies which cannot produce g & s themselves or produce enough for
domestic demand due to a lack of resources can trade for a supply
o Specialisation
o Specialise in the g & s in which they are most efficient – they have comparative
advantage
o This leads to better allocation of resources, increased production within
countries and throughout the world
o Efficient allocation of resources
o Countries are producing the g & s which they have a comparative advantage, so
resources are not being used by inefficient industries e.g. protective industries
are inefficient
o Increased economies of scale
o Lower average costs of production  increased efficiency and productivity
o Improved international competitiveness
o Domestic businesses face greater competitiveness & pressures from foreign
producers
o Govts. Will encourage domestic industrial efficiency  lower $ and higher
quality
o Innovation – encouragement of new technology and production processes throughout
the world
o Higher living standards – low prices, higher production, better choice and access to
goods  opening the global market & increasing growth

Disadvantages

o Increase in short term unemployment

o Domestic businesses may find it hard to compete with imports
o Should correct itself in the long term
o Domestic economy redirects resources to areas of production which it has
comparative advantages
o Infant industry
o Difficult for new industries to establish themselves. Larger foreign companies may
be able to produce at a lower price at first
o Dumping
o Production surpluses from other countries sold at unrealistically low prices on
domestic markets  Hurts efficient domestic industries
o Encourage environmentally irresponsible production methods
o Producers in some nations may produce goods at a lower cost
 o Weaker environmental protections & environmentally damaging practices

The role of international organisations

World Trade Organisation (WTO)

o Role is to promote global free trade between 161 countries, with 23 in observer status
o Promotes non-discrimination in trading policies – i.e. any protection concessions granted to
one country should be granted to all member countries and resolves trade disputes between
the countries
o Previously called the General Agreement on Tariffs and Trade (GATT) formed in 1947 and
was responsible for developing trade agreements. However no effective mechanism was in
place to enforce trade agreements
o Final Uruguay round by the GATT 1986-93 led to the formation of a new global trade
organisation with enforcement powers known as the World Trade Organisation
o The scope of the trade agreement went beyond trade in goods to trade in services also.
o The world trade organisations most important role is to settle disputes between countries. A
country suffering economic harm because another country has not complied with the WTO
ruling may lodge a complaint with the WTO. WTO then makes a ruling which must be
followed. However, this does not work for larger countries as lodging complaints during a
dispute can delay them.
o A secondary role is to decrease global protection levels. One of its main aims has been
reduction of protection in agriculture. Round conducted by the WTO can result in increased
global economic activity.

International Monetary Fund (IMF)

o Created in July 1944 following the end of World War II which included all 44 of the allied
nations. Currently has 188 member nations
o Role is to maintain international financial stability, particularly for foreign exchange markets.
The IMF lends money to member countries which are having trouble meeting financial
obligations to other members and in return debtor countries must undertake economic
reforms specified by the IMF.
o The IMF requires countries to change their economic policies before receiving economic
assistance. Strategies include deregulation, privatisation, reducing the size of govt. and
balanced govt. budgets.
o If a country experiences a financial crisis, the IMFs role is to minimise this by developing a
rescue package to stabilise the economy. E.g. 2008 GFC – where the IMF injected $250
billion into the global economy to promote liquidity, provided $157 billion of support to
specific countries in 2009, assisted developing countries affected by the crisis by suspending
payments on loans until 2011 and pledged to have a bigger role in the global financial
system as a result of the GFC
o However the IMF was criticised for making mistakes in regards to the Asian Economic Crisis
in 1997 by insisting contractionary policies which worsened the crisis.

World Bank
 o Created in 1944 – role shifted from European reconstruction post war to addressing poverty
and encouraging development. Role is to promote economic development – focused on
granting loans to developing countries.
o The official title of its main organisation is the international bank for reconstruction and
development. The main roles of the IBRD is to fund investment in infrastructure, reduce
poverty and help countries to adjust their economies to the demand of globalisation
o It achieves this through soft loans (no interest), private sector investment, millennium goals,
lending – e.g. during the GFC the world bank tripled lending to developing countries

United Nations

o Established in 1945, has 193 member countries as of 2015. Broad agenda encompassing
security, environment, poverty, law and global health
o Food safety (FAO), labour standards (ILO), aid distribution, millennium development goals in
order to improve economic growth and development.
o However, the UN is criticised as being Eurocentric, and favouring developed nations by
returning to protectionism after the GFC

Organisation for Economic Co-Operation and Development (OECD)

o International organisation with 39 member countries.

o Primary goal is to promote policies “to achieve the highest sustainable economic growth,
employment and rising living standards in member countries whilst maintaining fiscal
stability”
o Coordinates economic cooperation among member nations to develop common policies –
e.g. macro-economic stimulus policies within member countries during the GFC.
o Undertakes research and compiles statistics on member countries – comparative GDP,
inflation, unemployment etc.

Influence of government economic forums – G20. G7/8

G20

o 19 main countries in the world plus the EU. 80% of global GDP and 2/3 of the population
o Includes the G8 and some emerging economies. Includes china, Mexico, brazil and Australia,
world’s largest economies and the EU
o Main aim – coordinate global growth, coordinate global efforts to sustain global economic
growth
o Positive – since GFC, meetings to supervise implementation of macroeconomic policies to
ensure financial systems are safe
o Negative – limited effectiveness of G20 were highlighted in the 2014 Brisbane summit –
goals were made clear but the changes to member economic policies were unclear

G7/8

o Largest industrialised nations – half of the world’s GDP include: US, UK, France, Germany,
Canada, Japan, Italy and Russia. Known as the G7 as Russia was not previously included.
However, in 2014 Russia was expelled, for the violation of Ukraine’s sovereignty, and is now
known again as the G7.
o Main aim – agenda includes general political issues and current priorities such as climate
change, global poverty and security.
 o Positive – meeting annually to discuss conditions in the global economy.
o Negative – significance of the G7 is declining because of the exclusion of countries which
have recently grown in economic importance – China, Brazil

Trading blocs, monetary unions and free trade agreements

Trading bloc – occurs when a number of countries join together in a formal trading arrangement to
the exclusion of other countries. They include monetary unions such as the EU and NAFTA.

Monetary union – adoption of countries to single currency and a unified monetary policy

Free trade agreement – formal agreements between countries designed to break down barriers to
trade between those nations. Either bilateral or multilateral.

Advantages and disadvantages of multilateral (EU, APEC, NAFTA, ASEAN) and bilateral agreements

Multilateral agreement – between 3 or more countries.

EU:

o Most important bloc in the world. Single market for European G&S established resulting in
strong trade growth in the EU. Criticised for being discriminatory, as it intends to raise tariffs
and the introduction of the euro in 19 countries.
o Problems include the sovereign debt crisis in which other members had to help the PIIGS to
prevent the collapse of the EU.

Asia Pacific Economic Cooperation Forum (APEC):

o 21 members, including Australia, have trading benefits, but agree not to become a secluded
bloc like the EU, but instead reducing trading barriers. Non-discriminatory, will trade with
members outside the forum. ¾ Australia’s exports go to the APEC
o Problems include the Asian crisis of 1997 putting free trade by 2020 in doubt. APEC now
concentrates on political and social issues like climate change. Counter balances ASEAN as
APEC had more developed nations

North America Free Trade Agreement (NAFTA):

o US, Canada and Mexico – created in 1994. A free trade agreement which agricultural
protection is eliminate and other tariffs are reduced. US benefit by shifting labour to Mexico
to reduce costs. Canada and Mexico benefit by increasing exports to US

Association of South East Asian Nations (ASEAN):

o Free trade area including Indonesia, Thailand, Malaysia, Singapore, Philippines, Vietnam,
Brunei, Burma, Laos and Cambodia.

Advantages

o Increases in trade which has benefits of greater competition, more choice and lower prices
for consumers
o Expand the benefits of specialisation beyond domestic borders
o Factors of Production can move more freely between economies resulting in wider access to
economic growth opportunities
 o Regional agreements have increased and some economists refer to regionalisation rather
than globalisation

Disadvantages

o Trade blocs can restrain growth in particular export industries if trade diversion takes place;
this is where non-members lose export opportunities to less efficient nations
o 2/3 of 66% of European trade occurs within the EU – more of a closed trading bloc
o May harm local industries due to increased competition resulting in unemployment

Protection

Any government policy that gives domestic producers an artificial advantage over foreign
competitors such as tariffs on imported goods

Reasons for protection

Infant industry argument

o a young industry whose development is considered to be economically worthwhile may be

encouraged to expand if it is protected in its “infancy” from foreign imports – this should
only be temporary until the industry grows up and is willing to make the effort to become
more efficient
o at infancy they do not have economies of scale like their competitors
o tariffs should then be reduced over time. However, if the industry proves not to grow up, it
is very difficult to abandon as it will create unemployment
o protected with a subsidy during formation then phased out. Subsidies are low cost to the
gov. (biotechnology industry)

Domestic employment

o protecting employment and jobs – protecting an industry will protect the workers in the
industry locally.
o However over time, protecting inefficient industries will result in wastage of resources as
they move to the protected industry

Dumping of imports

o The main argument that economies accept in favour of protection

o Stopping another country selling goods in your country cheaper than they sell in their
markets to diminish competition e.g. reject shop

Cheap labour

o Unions in advanced economies argue that producers should be protected from competition
from countries that produce goods using cheap labour. Appropriate to also protect the living
standards of workers in high Y economies against imports from lower Y economies

Environmental factors
 o Countries sometimes block trade in goods because overseas producers may be able to
produce items more cheaply with countries holding less strict environmental standards

Defence

o A non-economic argument – protecting important industries like aircraft, minerals etc.

incase of a war as we need to be self sufficient in such circumstance

Methods of protection and their effect on the domestic and global economy

Tariffs

o A tax on imported goods imposed for the purpose of protecting Australian industries.
o Has the effect of raising the price of the imported good. Domestic produces supply a greater
quantity of the good  stimulating domestic production and employment. Leads to a
reallocation of resources to less efficient producers however.
o Consumers pay a higher price and receive fewer goods, redistributing income from
consumers to producers. A tariff also raises government revenue but that is not the main
objective.

Subsidies

o Grants, financial assistance, cash payments from the government to local businesses to
encourage production of a good or service. This will reduce its price and increase domestic
production, reducing the need for imports. Vertical distance between s1 and s2.
o Effects include increased domestic supply, stimulating domestic production and employment
in the protected industry.
o Consumers pay a lower price and receive more goods, although they are still paying
indirectly through higher taxes. Direct cost on gov. budgets.

Quota

o Restructions on the amount of goods imported to control the volume of goods. Guarantee
domestic producers a share of the market. Similar effects of a tariff but no gov. revenue
o Greater supply from domestic producers has the effect of stimulating production and
employment. Consumers pay a higher price and receive fewer goods.

Local content rules

o Goods must contain a minimum percentage of locally made parts. Potentially beneficial for
local producers, increasing production and employment

Export incentives

o Give domestic producers assistance such as grants, loans, technical assistance e.g.
marketing, legal information to encourage them to export their output and/or expand their
market share.

Globalisation and economic development

Differences between economic growth and economic development

Economic growth occurs when there is a sustained increase in GDP over a period of time (usually one
year) which may result in higher incomes of GNI (gross national income) per capita
Economic development is a broad measure of welfare in a nation that includes indicators of health,
education, environmental quality as well as Gross National Income per capita

The HDI is used to measure economic development, taking into account life expectancy at birth,
educational attainment and gross national income per capita. Measured on a scale from 0 to 1,
where 0 is no economic development, and 1 is full economic development. Comparing HDI and GDP
reveals the difference between growth and development.

2014 HDI – Norway the highest with 0.944, Australia 2 nd with 0.933. Niger the lowest with 0.33.

Distribution of income and wealth

There is an unequal distribution of income and wealth.

Gross national income (GNI) – the total income earned by domestically owned factors of production
over a period of time.

2015 GNI

o USA – largest economy in the world; $17 billion

o China - $9 billon
o Japan - $6 billion

To make true comparisons, GNI per capita:

o Norway $64 000

o Switzerland $54 000
o USA $52 000
o Australia $ 41 500
o China $9000

Purchasing power parity (PPP) – a theory that states exchange rates should be adjusted to equalise
the price of identical g&s in different economies

o High income economies which are industrialised receive around 2/3 of the worlds income as
measured in GNI, comprising of 1/7 of the worlds population
o Low and middle income economies have the large remainder of the population which
receive economic output which is only a fraction of the high income’s output
o Wealth is a safety net for people when they do not have income as it can generate income in
the future, which low and middle income economies do not have this. 10% of the population
accounts for 87% of wealth.

Income and quality of life indicators

HDI takes into quality of life indicators such as life expectancy at birth, educational attainment,
environmental quality and GNI per capita. There are four categories – Very High, High, Medium and
Low Human Development.

o Low and medium nations have 80% of the worlds population but only produce 40% of GWP.
These nations have high dependency on agriculture.
o High HD nations have low population growth, low birth rates and higher life expectancy

Developing, emerging and advanced economies

Developing

These countries generally suffer from low income levels, low living standards and weaker education
systems – Ethiopia, Bangladesh, Niger.

High income inequality, dependence on agriculture for employment, income and trade, low labour
productivity, reliance on foreign aid, weak political and educational systems, moderate economic
growth but high population growth. Corruption is common. Income $USD<1035 to 4085

Emerging

Are in the process of industrialisation and experience sustained high levels of economic growth –
Brazil, Russia, India, China, South Africa (BRICS)

o Rapid growth in exports

o Strong growth in manufacturing industries
o Government and economic policies promoting foreign investment and trade
o Substantial populations
o Income USD$4086-12615

Advanced

Countries that have high levels of economic development and liberal political/economic institutions–
US, Germany, Korea, Australia.

o High levels of income per capita

o Service industry very strong
o Manufacturing falling as a % of GDP
o High output per worker due to specialisation and machinery
o Income USD$12616 +

Reasons for differences between nations

Differences in the level of economic development between advanced, emerging and developing
economies is referred to as the development gap. There are both global and domestic factors which
lead to this gap:

Global

Global trade system

o Some aspects work against a reduction in inequality. High income nations protect their
agriculture against competition in order to benefit rich farmers
o Trading blocs like the EU and NAFTA act to exclude poor nations from access to global
consumer markets. Est. 1% increase in share of world exports from poor countries would lift
128 million out of poverty
o Implementing trade agreements against protectionist measures cost significant amounts 
inadvertedly excluding poor nations

Global financial architecture

o Deregulated markets intend to create development opportunities by enabling free flow of

funds, it can establish global inequalities
 o Previously, FDI favoured developed economies, but now developing economies receive a
larger share. Emerging economies experience short term financial inflows from speculators
in the stock market. This can however lead to economic volatility  1997 Asian crisis
o Criticisms towards organisations like the IMF and its structural adjustment policies favouring
the interests of rich countries. Response to the GFC was bailing out rich countries
o Many developing countries have massive foreign debt. The continuous cycle of debt shifts
spending away from sectors which could enhance economic growth and development.

Global aid & assistance

o Total level of development aid from high to low income countries was 0.3% of GDP in 2014
o Global economic recessions have seen developed countries reduce the amount of aid by 1/3
o Phantom aid – much of the aid goes to consultants and workers in donor countries
o Countries will also aid countries which they support politically

Global technology flows

o Developing countries have difficulty accessing technological developments due to high price
and intellectual property restrictions
o Much of the technological uses are directed to enhancing health via pharmaceuticals. Very
little is of benefit to poorer nations which are labour intensive with little capital

Domestic

Economic resources

o Access to natural – oil rich, land rich, fertile countries have better opportunities for
economic development e.g. oil rich in the middle east
o Access to labour – advanced economies have a higher skilled workforce
o Access to tech – determines productive capacity and productivity
o Entrepreneurial culture – weak political and economic institutions dampens investor
confidence

Institutional

o Political and economic institutions that can encourage/discourage business prosperity and
investment and consumer confidence.
o Gov. responses to globalisation – policies regarding trade liberalisation, investment flows
and TNCs allow countries to take advantage of integrated economies

Effects of globalisation

↑ globalisers – countries which increase their ratio of trade to GDP grew 4x larger than those
economies which did not increase their ratio. China + ASEAN have increased trade which has
improved their economic development  decrease in world poverty. Chinas economic growth
14.7% in 2007 – average 9.5% since 2000

↑ international convergence – same economic systems e.g. the market economy. Economies
interacting with each other have similar characteristics such as operation, performance and
consumption
↑ financial contagion – where there is a flow on effect from one or more economy to other
economies. Can be seen through the GFC starting in the USA.

o If globalisation lifts economic growth rates in individual economies, it also raises income
levels and provides more resources for education and healthcare, contributing to increases
in economic development.

Trade, investment and Transnational corporations

o Globalisation has resulted in substantial increases in trade flows and foreign investment.
Because TNCs play a key role in both trade and investment flows, they too have increased.
o TNCs contribute to flows of technology and output which impacts on the standard of living
and GDP respectively.
o FDI – now replacing foreign aid as TNCs are set up in developing nations to capatialise on low
costs and low restrictions  increased economic growth, employment and standards of
living in developing countries.

Environmental sustainability

o Low income countries which are desperate to attract foreign investment may engage in
economic behaviour which harms the environment – deforestation, unsustainable fishing,
mining operations
o Climate change is the most significant – economic activity increasing  production increases
 increased levels of carbon emissions.
o Kyoto protocol helps with this by setting carbon emission reduction targets for industrialised
countries.

International business cycle

o Closer linkages between economies hold benefits and risks for countries in the global
economy;
o Changes in world demand leads to changes in economic activity and world output, also
effects trade and investment flows.
o Benefits of integration – allows countries to achieve faster rates of growth by specialising in
certain types of production and engaging in trade
o When the IBC is experiencing an upturn, individual economies are more likely to benefit
from increases in demand.
o However, closer economic integration also makes economies more exposed to downturns
o Weak economic management in an individual economy can lead to negative impacts in
terms of employment, income inequality and damages to local businesses.

Overall, global growth will receive a boost from lower oil prices and is projected to be 3.8% in 2016.
However, china, Russia, euro and japan forecast to achieve lower growth. USA projected to grow.

Lower growth in china  implications for Australia such as reduction of exports to china through
regional supply networks.
Interest rates remain low in most advanced economies which is helping support economic activity.