2019 HSC Economics Complete set of Notes with 2 Essays PDF

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HSC complete Economics notes for year 12...

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TOPIC 1: THE GLOBAL ECONOMY International economic integration The Global Economy Gross World Product Gross World Product: the aggregate value of all goods and services produced worldwide in a year (a global version of GDP) - GDP of all countries/economies Globalisation Globalisation is 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. - Indicators of globalisation - 1) International trade flows in goods and services - 2) International financial flows - 3) The growth of international Investment and TNC’s - 4) The increasingly internationalised Labour Market ● Trade in goods and services - The level of international trade flows have increased rapidly - $US 6T in 1986 to $US 42T in 2018 - 37% of global output in 1986 to 54% of global output in 2018 - Composition of trade flows: Dominated by manufacturers (declining) Trade in finance and communication set to grow into the future - Direction of trade flows: Traditionally dominated by high-income nations, though this is undergoing change High-income nations accounted for 82% of all trade in 1995, now down to 64% in 2018 East Asia and pacific 7% in 1995 to 18% in 2018 ●

Financial flows Globalisation of financial flows play a leading role in the global economy All indicators show an increase in financial flow over the past few decades International financial flows have expanded substantially since the deregulation of the financial system One important feature of international finance: Foregin Exchange Markets (FOREX) FOREX markets are networks of buyers and sellers exchanging one currency for another in order to facilitate flows of finance between countries The main drivers of global financial flows are speculators Speculators are investors who buy or sell financial assets with the aim of making profits from short-term price movements. - Often criticized for creating excessive volatility in financial markets Global financial flows enable countries to obtain funds that are used to finance their domestic investment e.g., Foreign Investment The International Monetary Fund (IMF) is responsible for the overall stability of the global financial system Exchange traded derivatives have grown x20 since 1990 By 2013, annual exchange traded derivatives had reached $US 73T - Almost the same size as the global economy The flow of funds almost dried up when the GFC struck in 2008, as financial institutions stopped lending to one another due to ‘mountains of toxic debt’ in the -

financial system Foreign exchange volumes have also increased Network of buyers and sellers exchanging one currency for another (AUD FLOATED 1984) Huge increase in FOREX markets with daily turnover of $5T per day being traded worldwide ●

Investment and transnational corporations Foreign Direct Investment: Movement of funds between economies for the purpose of establishing a new company, or buying a controlling share (more than 10%) of shares in an existing company -Long term investment Investors intend to be involved in the management of the business In recent years, there has been a steady increase in FDIs (particularly because of countries lifting restrictions on FDI e.g. floating exchange rate, financial market deregulation) Significant drops in FDI in 2001 and 2009-10, due to the dot com bubble burst, and the GFC FDI has traditionally favoured developed nations Has recently shifted towards emerging economies In 2014, emerging and developing nations received 59% of FDI inflows FDI flows have increased from $US200b in 1990 to around $1.7T in 2018 TNCs: Major contributor to the growth of FDI E.g. Walmart, Shell, BP, Toyota Operate in at least 2 countries Many production facilities around the world Whenever a TNC establishes a subsidiary (a company controlled by another company- owning 50% of it shares) within another economy, it is providing FDI to that country, which is a source of investment funds As TNCs expand, they bring capital, technology, skills and knowledge which improves productivity and output levels- this is particularly helpful in developing and emerging economies They also increase employment and improve the skills of the workforce by providing training Governments encourage FDIs from TNCs through subsidies, access to cheap labour + environmental regulations

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Technology, transport and communication Facilitates process of globalisation Information technology revolution Freight economies- benefit from more efficient systems to facilitate greater trade in goods and services e.g. roads, railways, ports Internet has allowed for international communication and is widely used in financial markets with the majority of money exchanged online More efficient aircraft and high speed rail = greater mobility and transport options TNCs operating overseas tend to bring capital equipment from overseas The better the technology, the better the trade transportation and communication which is important for maintaining costs associated with conducting business internationally

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International division of labour, migration Migration: The movement of people between countries on a permanent or long term basis (12 -

months or longer) Labour markets = less internationalised that markets for goods and services Labour markets are less globalised, as people cannot always move from country to country Even though there are a large amount of restrictions, migration has increased in recent years, because there are more opportunities overseas than ever before Almost 70% of the world's migrants live in high-income countries The movement of labour between economies is concentrated at the top and bottom ends of the labour market Top end: highly skilled workers are attracted towards the richest economies such as US and EU economies (for higher incomes) Bottom end: low skilled labour is in demand in advanced economies (require only basic skills) Trends in migration reflect an international division of labour where people move to the jobs where their skills are needed Barriers to the movement of labour: Immigration restrictions Language Cultural factors Incompatible education and professional qualifications International division of labour: Can also be the shift in businesses instead of people E.g. when global corporations shift production between economies to find the most efficient and cost effective labour (offshoring) Reflects the theory of comparative advantage- that an economy should produce what they can at the lowest opportunity cost (most efficient) E.g. developing nations have a large population of workers in the labour intensive manufacturing Advanced economies have shifted away from labour intensive manufacturing to focus on specialised service, particularly in the areas of the economy that use more highly skilled workers 200 million people have migrated to work in different countries (estimated) The international and regional business cycles Business cycle: fluctuations in economic activity. Periods of expansion and contraction. - Business cycles of individual economies have become synchronised - Growth patterns in regions tend to move together - When a country is experiencing high growth, its people get higher incomes, and spend more on imports. This means the trading partners are getting more revenue from their exports, which will result in higher levels of economic growth for them too International business cycle: - Fluctuations of economic activity in the global economy - Economic growth to individual economies is higher when global growth is high - 63% of changes to level of output in Australia is due to interest rates, growth levels, inflation rates in largest industrialised nations, meaning that international factors have a greater influence on the economy than domestic factors Regional business cycle: - Fluctuations in level of economic activity in a geographical region of global economy - Country’s economy can be affected by regional changes E.g. impacts on US economy will have a ripple effect for Canada, Mexico In the east Asia region, economic conditions are determined by the growth of China and Japan Low income nations tend to be less integrated - Reasons for difference in economic patterns between regions: Presence of a large economy with varying degrees of inequality Economic crisis can intensify regional business cycles -

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Different stages of development Common economic policies (e.g. EU with common monetary policy)

Trade, financial flows and foregin investment The basis of free trade - its advantages and disadvantages Trade in the global economy: - Comparative Advantage: theory states that even if one country can produce all goods more efficiently than another country, trade will still benefit both parties - Each economy specialises in the production of the good in which it is comparatively more efficient at producing - Free Trade = no artificial barriers to trade imposed by governments, as they have the aim of shielding domestic producers from foregin competition Advantages of free trade: - Access to resources that a country cannot produce itself - Increased living standards - Improved consumer choice - Improvement in efficiency, by allowing countries to specialise in goods and services that they are most efficient, leading to economies of scale and increased production -Specialisation leads to economies of scale - lower costs of production, whilst increasing productivity - Improvement in economic outcomes - Better resource allocation - Improvement in international competitiveness - Protection of domestic employment- tariffs and other protection methods work to increase the prices of imports, making them more unattractive for consumers to buy. This makes our local goods more attractive and therefore in demand. Because labour is derived demand for goods and services, protection allows for increased employment. Disadvantages of free trade: -Dumping- production surpluses may be “dumped” on the domestic market at unrealistically low prices, which may affect efficient industries- they may be unable to compete with foreign firms, and may be forced out of business, causing a loss in a country’s productive capacity. The only gain from dumping is lower prices for consumers, however, his is only in the short term as once the competition is eliminated, foreign produces will raise their prices again. -Domestic employment may fall, as Australian firms close because domestic businesses may find it hard to compete with imports. However, this is mostly structural unemployment that corrects itself in the long term, as resources are redirected to areas of production in which it has a comparative advantage. -Infant industries struggle to compete- provides no incentive for the industry to reach a level of efficiency that would enable it to compete without protection. Governments should provide temporary assistance only to industries that have a good chance at achieving comparative advantage -Environmentally irresponsible production: negative externalities - because producers in some nations may produce goods at a lower cost due to weaker environmental protections and environmentally damaging practices Role of international organisations - WTO, IMF, World Bank, UN and OECD 161 member countries - Implement multilateral free trade agreements to promote trade liberalisation

- Facilitate international trade flows - Resolves disputes through discussion or providing a decision, e.g. Doha Round, goal of reducing global protection - Encourages dismantling of trade barriers between economies, promoting free trade - E.g. China was required to reduce its average tariff from 35% in 1990 to 15% in 2001 in order to join the WTO IMF: - 186 member countries - Focused on financial flows - Ensures global financial and economic stability - Assist countries experiencing a currency crisis and prevent crises from spreading to other countries via the financial contagion effect (where reduced investment and trade slows growth in other economies) - Avoid global recessions and currency crises - E.g. helped Turkish economic crisis and GFC - E.g lent $160 billion USD in 2009 during the GFC to help countries pursue stimulatory macroeconomic policies - Only give packages to economies that agree to adjust their financial policies - Often face criticisms for making crises worse, e.g. AFC - They recommended for the countries suffering to raise interest rates to stimulate demand for the currency, thus leading to an appreciation. However, this contractionary stance in a time of weak economic growth (-10% in Thailand in 1998), was criticised for worsening growth and employment World Bank: - Coordinates multilateral aid to promote economic growth and development - Development of poorer countries - Foreign funds to build schools, hospitals and industries - Provides loans to developing nations (soft loans, with little or no interest) - Vital cash flows that poor countries can’t obtain otherwise - Debt relief packages - Encourage private investment into development projects - In 2014, the World Bank made US $66 billion in loans, grants and equity investments to reduce global poverty - Involved in debt forgiveness to developing countries, to reduce sovereign debt burden - HIPC initiative (Heavily Indebted Poor Countries) conducted by the World Bank in conjunction with the IMF to pay off debt on behalf of 39 countries, and free up government funds for infrastructure spending, rather than having to service these debts. UN: - 193 member states - Supports greater linkages between economies - Universal membership - Unified global standards which make it simpler for countries to invest and trade - E.g. Food and Agricultural Organisation of the UN established global standards for food safety - Global security - Strong environmental focus - International health - International law - Contributes to a more globalised world - Focused on economic development - Boosting quality of life indicators - Also responsible for setting the Millenium Development Goals to improve living standards in developing nations. This had mixed results. The goal of halving extreme poverty from its 1990 levels was successful in Asia, but poverty is still a problem in Sub-Saharan Africa

OECD: - 34 advanced economy members - Employment - Fiscal stability - High standards of living - Main role in practice is researching into different economies and their issues - Helps coordinate international economic action - E.g. $52 billion stimulus into Australia, which helped us to avoid the recession, with GDP growth of 1.7% in the worst year of the GFC (2009) Influence of government economic forums - G20, G7/8 G20 - 1999 - Created in response to a number of financial crises during the decade - Met for the first time in 2008 after the GFC - Supervision of the financial sector - Coordinated policy response to the GFC G7/8 - 1976 - Italy, Germany, France, Japan, Canada, US and UK (most important economies at the time) - (and Russia until 2014) - Discuss subjects such as economic growth and international security Trading blocs, monetary unions and free trade agreements (EU, APEC, NAFTA, ASEAN) and bilateral agreements Trading blocs: - When countries in a region formally cooperate on trade by implementing FTA - May apply more protection against non-members - E.g. NAFTA - North America Free Trade Agreement (Canada, Mexico and US) Monetary union: - Member economies adopt a common currency - Are run by the central bank - E.g. EU - The central bank implements one monetary policy, or one interest rate - Synchronisation facilitates economic management - Encourages investment between member economies, but excludes Free Trade Agreements: - Bilateral: between 2 members e.g. CERTA (Australia and NZ) - Multilateral: multiple members e.g. ASEAN (emerging and developing economies- Thailand, Vietnam, Philippines, Indonesia) Protection Reasons for protection - infant industry argument, domestic employment, dumping, defense Protection: - When governments impose policies that give domestic producers an artificial advantage against foreign competitors - Helping Australian firms so they can have a chance against foreign producers - E.g. imports are more expensive and less attractive, or make local goods cheaper and more attractive (international competitiveness) Infant industries:

- New industries face difficulties and risks in early years - Often start out small scale, with costs that are relatively higher than those of established competitors - Protection to protect industries that are newly established - Infant industries may need to be “shielded” from competitors in the short run - Without protection = no incentive for industry to reach a level of efficiency that would enable it to compete without protection - New firms must build economies of scale in order to compete against large foreign firms - Protection can “buy” the firms, to become more internationally competitive by increasing output - Some industries, however, continue to rely on assistance for many years Prevention of dumping: - Dumping = when foreign firms sell their goods in another country’s markets at an unrealistically low prices - May be done to dispose of large surpluses or to establish a market position in another country - They are usually only of a temporary nature, but can harm domestic industries - Only gain = lower prices for consumers in the short term. - Protection makes imports more expensive, due to the tax place upon imports (exporters pay tax) Protection of domestic employment: - If we protect our industries to protect employment, this creates jobs that are inefficient Defence and Self Sufficiency: - Won’t accept goods from other countries to allow for self-sufficiency in case of a crisis Other arguments in favour of protection: - Producers should be protected from competition with countries that produce goods using cheap (or exploited) labour or degrade the environment - Trade embargo imposed on countries that may have broken international law Methods of protection - tariffs, subsidies, quotas, local content rules, export incentives Tariffs:

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- Government imposed taxes on imports - It has the effect of raising the price of the imported goods, making the domestic producers more competitive - E.g. 50c + 10c tariff = 60c to buy in Australia - Influences us to purchase Australian goods - Source of government revenue - Keeps inefficient industries operating - Consumers pay more for their goods and services May invite retaliation from

other countries Tariff graph:

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- PW = no protection - World price = price traded internationally (international competitiveness lowers the world price) - Imports = Q4-Q1 - Q1 = what the firm supplies - Q4 = what consumers demand - Imports represent money leaving the economy - Tariff introduced = above PW - P2 = tariff - Introduction of tariff = demand contracts (Q2-Q3) - Supply increases (Q4-Q1) - Imports fall with tariff Market share of domestic

firms increases Effects of a Tariff: -

Stimulates domestic production and employment - As the price of imported goods increase, the demand of domestic goods contract - The supply of domestic goods expand - Government revenue goes up - More domestic resources are attracted to the protected industry, this leads to a reallocation of resources towards less efficient producers.

Advantages: - Extension in supply, increasing production and employment - Creates a source of revenue for the government Disadvantages: - Contract domestic demand - Consumers pay a higher price - Causes a reduction in allocative efficiency- resources are diverted away from efficient industries to the inefficient, protected industry Quotas:

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- An import quota controls the volume of a good that is allowed to be imported over a given period of time - The quota guarantees domestic producers a share of the market - A quota would expand domestic supply and raise the price of imported goods = Demand for domestic goods will rise - Do not provide tax revenue for the government - However, some revenue may be obtained through selling of import licences - ...