Topic 1 – The Global Economy

Resource Description

CHAPTER 1 SUMMARY: INTRO TO THE GLOBAL ECONOMY

GROSS WORLD PRODUCT

• Gross World Product (GWP): total value of all G+S produced worldwide each year o 10 x 1950 level à volume 50 x 1950 level
• GLOBALISATION: the increased connectedness between countries and their economies through a process of integration

TRADE-IN GOODS AND SERVICES:

•  A measure of how G+S produced in an economy are consumed in economies around the world
  o Grown rapidly: US$8.7 trillion in 1990 à US$46 trillion in 2014
• High volumes of global trade = economies don’t produce all G+S they need, or not as efficient
  o Grown b/c new technology in transport + communications à reduced costs
  o Also removal of barriers to trade + new trade agreements
  o Richest 15% of nations had 61% of global trade, poorest 30% less than 4%
•  Composition of trade: what G+S are traded
  o Used to be dominated by manufactures à growth in fuels, minerals, services
•  The direction of trade flows: where the G+S traded move from and to
  o Changing à reflects changing importance of economic regions
  o 1995-2014: North US + Western Europe à 82% to 70%
  o 1995-2014: East Asia + Pacific (China, Indonesia, Vietnam) à 7% to 17%
• Terms of Trade: relative prices of exports compared to imports à favourable = $X rise faster than $M
  o Export Price Index x 100 Import Price Index

FINANCIAL FLOWS:

• Foreign exchange markets (FOREX) are an important feature of international finance à networks of buyers and sellers exchanging one currency for another
  o Daily turnover reaching almost $5.5 trillion in 2014
  o Only 5% of FOREX market involves payments for G+S, 95% is speculative investment
• Main benefit: enables countries to obtain funds to finance domestic investment = EG
•  Negative economic impacts: speculation creates volatility à herd mentality
• AUD is the 5th most traded currency

INVESTMENT AND TRANSNATIONAL CORPORATIONS:

•  Foreign direct investment (FDI) à movement of funds b/w economies to establish a new company or buy a substantial proportion of shares in an existing company (10%+) à long term investment
  o 2012: LICs received more FDI than HICs
  o Long term: more FDI to HICs – safer à short term: more going to MICs – profits
  o 68% comes from richest 20%, 1% from the poorest 20%
• Transnational corporations (TNCs): production facilities overseas à bring investment, technology, knowledge
  o Governments encourage TNCs through incentives (subsidies, tax concessions)
  o 82 000 TNCs with 810 000 foreign affiliates à number falling b/c mergers and takeovers = hold more power
  o 1/3 of all world trade, 1⁄4 total output

TECHNOLOGY, TRANSPORT AND COMMUNICATION:

•  Technological developments facilitate integration of economies
  o Cheap + reliable communications = international services à 2000-2012: internet use ­ 566%
  o Finance + investment: rapid movement of money worldwide
  o Phones + internet = changing structure of industries à online
  o Advances in transport (aircraft, rail) allow greater labour mobility, better movement of G+S
• Firms move directly into overseas markets to sell G+S à invest in new countries tech drives FDI
• Benefits: stock ordered instantaneously (reduces waste), IT systems maintain inventories  (reduced warehousing costs), increased choice, lower prices (increased competition)
• Structural changes in production + distribution of G+S

INTERNATIONAL DIVISION OF LABOUR, MIGRATION:

• Labour markets far less internationalised à people do not move jobs so freely
•  Outsourcing of work to countries with cheap labour is increasing e.g. manufacturing, communications
•  World Bank estimates 230+ million people have moved country for work
  o Highly skilled to wealthy economies – higher pay, better opportunities à Brain Drain
  o Low skilled to HICS – not enough locals for some work
• Barriers to working overseas: immigration, language, culture, incompatible education + qualifications

THE INTERNATIONAL AND REGIONAL BUSINESS CYCLE:

• International business cycle: fluctuations in the level of economic activity in the global economy
•  Factors that strengthen the international business cycle:
  o Trade Flows: affects demand for G+S
  o Investment Flows: can affect confidence, herd mentality
  o TNCs: spreads international business cycle

ECONOMICS
o Financial Flows: spreads international business cycle
o Global Interest Rates: Monetary policy influenced by interest rates abroad
o Commodity Prices: role in general level of inflation
o International Organisations: influence global economic activity
o Technology

• External Shocks:
  o Real shocks à changes in world output, commodity prices, technological change = structural changes
  o Financial shock à changes in financial variables à transmitted more quickly than real shocks
• Ties b/w countries enhance the effect that one country’s events/performance has on another à e.g. EU
  o E.g. Synchronisation is highlighted by GFC

CHAPTER 2 SUMMARY: TRADE IN THE GLOBAL ECONOMY THE BASIS OF FREE TRADE – ADVANTAGES + DISADVANTAGES

• Free trade: Gov’s impose no barriers to trade that restrict the free exchange of G+S between countries, with the aim of
  shielding domestic producers from foreign competitors
•  Advantages:
  § Access to G+S countries cannot produce
  § Specialisation in production – comparative advantage
  § Efficient allocation of resources
  § Economies of scale à specialisation = ̄ costs of production = increased efficiency
  § Encourages innovation and spread of new technology
  § Higher living standards
• Disadvantages:
  § Short term UE: domestic firms find it difficult to compete à ̄ production = UE
  § Infant industries: difficult to establish if not protected from large foreign competitors
  § Dumping of surpluses
  § Environmentally irresponsible production methods

ROLE OF INTERNATIONAL ORGANISATIONS
1. Manage instability
2. Assist countries experiencing economic crises
3. Develop global standards
4. Establish global rules on free trade
5. Resolve disputes

•  World Trade Organisation (WTO): implement and advance global trade agreements and to resolve trade disputes
  between economies à power to enforce agreements
  o General Agreement on Tariffs + Trade (GATT): couldn’t enforce à Uruguay Round = WTO
  § Now includes services and intellectual property
  o Doha Round: to free up global trade à remove agricultural protection, lowering tariffs on manufactures +
  reducing restrictions on services trade
• International Monetary Fund (IMF): maintain international financial stability
  o Advice + financing to members, work with developing nations to help achieve stability + reduce poverty
  o Supports free trade and movement of finance + capital globally
  o Structural Adjustment Policies: demand countries make changes before receiving aid à up to 125% quota
  § Helped Thailand, problems for Indonesia
  o Funds paid by members (based on national income), voting power based on contributions
•  World Bank: helping poorer countries with economic development, investment in infrastructure, reducing poverty
  and in adjusting economies to the demands of globalisation
  o Aim: reduce extreme poverty to 3% of global pop. by 2030 + raise incomes for the lowest 40% of earners
  o Controlled by members à voting power based on contributions
  o Millennium Development Goals (MDGs)
  o Support of Heavily Indebted Poor Countries Initiative: reduce debt by 2/3 in 46 of the poorest countries
•  United Nations (UN): agenda is broader than any other organisation à global economy, poverty + development, international law, global health issues, environment, international security à internal agencies + orgs
  o Maintain international peace and security
  o Established 1945, 193 members
• Organisation for Economic Cooperation + Development (OECD): achieve highest sustainable EG+D, raise standard of living
  o Coordinates economic cooperation among members
• Trans-Pacific Partnership (TPP): 12 parties e.g. Aus, NZ, Canada, Japan, Singapore
  o Potential to forge stronger economic links b/w economies
  o Access to new markets à e.g. opportunities for Aus. goods + services