HSC Economics - Topic 1 - The Global Economy PDF

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Topic 1 – The Global Economy ↑

International Economic Integration Give examples for everything Important Definitions: The global economy consists of all countries in the world that produce goods and services and contribute to the Gross World Product (GWP). These economies can be categorized as advanced, emerging and developing each with their own unique characteristics. These countries engage in international trade and financial flows. Globalisation is the economic, social and political integration between countries and the increasing impact of international influences on all aspects of life and economic activity. This can be seen through the movement of labour, foreign direct investments and increased communications and transport technology. Economic integration occurs when trade barriers are reduced or removed between countries in order to facilitate the growth in free international trade and flows of foreign investment. This often resulted in greater economic growth thus better standards of living. 

The Global Economy

The global economy is one where economies of individual countries engage in international trade and finance, thereby participating in global markets for G/S, contributing to GWP, world trade flows and flows of direct/portfolio. The global economy is measured by the International Monetary Fund (IMF) by adding the gross domestic product (GDP) of all countries at purchasing power parity (PPP). PPP is the most common way to compare different countries’ currencies and thus as a result compare their GDPs. Advanced economies (39) are characterized by high levels of economic development with high per capita incomes. They are usually market based economies with free enterprise economic systems of resource allocation and limited gov. intervention. These economies usually have high QOL but lower eco growth. o Advanced – USA, Japan, Australia, Germany, UK etc. Emerging and Developing economies (154), emerging economies are characterized by high eco growth and development but lower QOL then advanced economies. Whereas developing economies have the lowest QOL and very low eco growth.

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Emerging – China and India Developing – Congo and Ethiopia

Gross World Product

Gross World Product (GWP) is the sum of all nation’s GDP and is one of the measurements of global economic growth. GWP at PPP is the total value of all goods and services produced by all countries over a given time period, adjusted for national variations in price and different exchange rates. It is valued in USD due to the US dollar being the world’s reserve currency. As of 2018, the GWP was $88.24 trillion USD. Approximately 65% of the GWP is made up of the service sector followed by 26% in industry. China is also the largest contributor with 18.69% of the GWP followed by the US with 15.16%. Although there are only 39 advanced economies (20%) they make up for 40.84% of GWP with the 154 emerging and developing economies making up the other 59.16%. Overall, in 2018 world economic growth was at 3.6% with a predicted plateau and slowing of economic growth on a global scale. This is seen by the advanced economies decreasing contributions to the GWP and the emerging and developing economies increasing share. 

Globalisation

Globalisation is the process by which the world is becoming increasingly interconnected with increased international influence on all aspects of life and economic activity. Globalisation is driven by various factors including: - Trade in goods and services - Financial flows - Investment and transnational corporations - Technology, transport and communications - International division of labour, migration Globalisation also involves: - Free market capitalism (open markets, privatization, deregulation) - A homogenizing culture – international convergence – similar eco systems - ↑ Tech These drivers increase economic interdependence between nations which can as a result cause countries to become more integrated within the global economy. Prior to globalisation, the Australian economy was protected with foreign participants facing many restrictions as well as many sectors being highly regulated. The TCF (Textiles, Clothing and Footwear) industry is one such industry that was heavily regulated against foreign participants seen through trade barriers like tariffs, quotas and subsidies. International Trade – the exchange of goods and services between countries

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International Financial Flows – movement of financial resources from one country to another for the purpose of investment, trade or business production. Financial Deregulation – the process of removing government rules controlling the way banks and other organizations within the financial sector operate Speculators – investors who buy or sell financial assets with the aim of making profits form short term price movements Foreign Direct Investment (FDI) – movement of funds between economies for the purpose of establishing a new company or buying a substantial proportion of shares in an existing company. FDI is generally considered a long term investment with investor tending to play a role in the management of the business. Migration – the movement of people between countries on a permanent or long term basis International Division of Labour – how the tasks in the production process are allocated to different people in different countries around the world o Trade in goods and services International trade is the exchange of goods and services between countries and is an important indicator of globalisation because it is a measure of how goods and services produced in an economy are consumed in other economies around the world. Trade between countries allow for a more diverse range of goods and services previously unavailable. International trade also allows countries to participate in the global economy thus encouraging more foreign direct investments. These flows between countries are usually categorized as imports (M) and exports (X). Goods Iron Ore and Coal (Export largest Australia) Vehicles (third largest import Australia)

Services Education (largest service export Australia) Tourism (export in Maldives – 38.92% GDP)

Value of global trade: $4.3 trillion USD – 19% global output (1990) vs $25.1 trillion USD – 30% global output (2018). Global trade as a sector has grown rapidly in the recent decade. Between 1995 and 2004 the volume of world trade grew by 7% on average.

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The graph above shows the volatility of world trade in comparison to GWP, where GWP has relatively constant growth rate with the exception of during the GFC (2009). This is contrasted by the constant fluctuating nature of world trade growth. The WTO (World Trade Organisation) forecasts global trade growth to be 2.6% in 2019 and 3% assuming the easing of trade tensions. Commonly associated with the WTO (World Trade Organisation) Value, Composition and direction Importance of trade

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Financial flows

International financial flows are the movement of financial resources from one country to another for the purpose of investment, trade or business production. International finances play a key role in the global economy, this is because the finance is the most globalised sector of the world economy as money moves between countries faster than goods and services or labour. The amount of international financial flows has increased exponentially after the financial deregulation that occurred around the world, which in most countries occurred between the 1970s and 1980s. Controls on foreign currency markets, flows of foreign capital, banking interest rates and overseas investments in share markets were lifted. New technology and global communications networks have linked financial markets throughout the world allowing for events in major international markets e.g. New York, Tokyo and London to produce immediate results. There is not a single measure of international financial flows, but all have shown a dramatic increase during the globalisation era. Examples of international financial flows include: 1.) Capital investments

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2.) Portfolio investments 3.) Foreign Direct Investments (FDI’s) Countries borrow and lend internationally Foreign exchange markets (forex markets) are an important feature of international finance as they are networks of buyers and sellers exchanging one currency for another in order to facilitate flows of finances between countries. Forex markets have experienced high growth with an average daily turnover of USD $4 trillion in 2014 to $5.1 trillion in 2016. The main drivers of the global financial flows are speculators and currency traders who shift billions of dollars in and out of financial markets worldwide to undertake short term investments in financial assets. The Bank for International Settlements’ Triennial Survey found that only a small share of all forex transactions are for “real” economic purposes such as trade and investments. A vast majority of the transactions are for speculative purposes – to derive short term profits from currency and asset price movements – or for technical purposes such as hedging against future exchange rate movements and swapping funds between currencies. The aim of these interactions is either to gain from short term movements in asset prices – namely currency and share price fluctuations – and to generate profits, or to hedge against future movements and minimize financial risk. The main benefit of greater global financial flows is that they enable countries to obtain funds that are used to finance their domestic investments. Investors in countries with lower national savings levels might not be able to obtain necessary funds in order to finance large business and investments projects. In this regard, international financial flows may enable a country to achieve higher levels of investment and as a result economic growth then if overseas investment was not available. Changes in global financial flows can also have significant negative impacts on economies. Speculative behavior can create significant volatility in forex markets and domestic financial markets. This is because speculators are often accused of acting with a herd mentality, meaning that once an upward or downward trend in assets prices is established it tends to grow. Speculative activity has been blamed for large currency falls and financial crises in East Asia in 1997 and the British pound in 2016 following the Brexit referendum. The International Monetary Fund (IMF) is responsible for the overall economy stability of the global financial system. One of its role is to stabilize individual economies experiencing currency crises or financial turmoil in order to prevent flow-on effects to other economies. Finance is usually short term whereas investments are usually long term. Finance – shorter term, speculative shifts of money

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Investments – longer term flows of money to buy or establish businesses Transnational Corporations – Global companies that dominate global product and factor markets

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Investment and transnational corporations

Definition Foreign Direct Investment (FDI) refers to the movement of funds between economies for the purpose of growing a business. A measure of globalisation of investments is the expansion of FDIs which involve the movement of funds that are directly invested in economic activity or in the purchase of companies. Reforms in developed and developing countries allowed for a rise in FDIs in the 1980s and the following three decades. Prior to the 1990s FDI flows favored developed economies however this dominance has now shifted with a greater share of FDI destined for developing and other economies around the world. A majority of FDI inflows to developing countries flow to economies in Asia. The largest investors are Japan, China and France all of which have invested over 100 billion USD overseas. Transnational Corporations (TNCs) play an important role in global investment flows. Often they have production facilities in countries around the world, sourcing inputs from some countries, doing most of the manufacturing in another country, and doing other packaging and marketing tasks in another country. Some big TNCs include, Apple, Shell and Toyota who employ large amounts of labour and capital across the globe. Although there has been an increase in investment globally, for most countries investment still comes primarily from domestic sources. FDI typically only accounts for less than 20% of total investment. Role

Function Advantages Disadvantages - Highly affected by economic growth - Highly affected by geopolitical uncertainty and US tax policies o

Technology, transport and communication

Role Technology plays a central role in globalisation. This is because technological development helps facilitate the integration of economies for example:

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1.) Developments in freight technology such as standardized shipping containers, cargo tracking and more efficient logistics systems  greater trade in goods 2.) Cheaper and more reliable international communication through availability of high speed broadband  the provision of commercial services to customers globally. Seen through the global population using internet being 7% in 2000 and 49% in 2017 3.) In finance and investment, technology has played a key role in facilitating the movement of capital throughout the world in fractions of a second 4.) Smartphones and access to mobile internet has fundamentally how many sectors function. This can have both advantages and disadvantages for different sectors 5.) Advances in transportation e.g. high speed railway and flight have allowed greater mobility of labour between economies as well as increasing accessibility to tourism and travel for consumers. These few examples demonstrate the importance of technology in both transport and communications networks. These networks are fundamental each economy and greatly promotes international economic integration through globalisation. Innovation in technology is often an ongoing process with new technologies spreading to other nations which as a result boost overall integration further on a global scale. Large corporations like Google, Oracle and IBM have extensive global operations that often target developing economies and drive foreign investment through technological changes. The internet provides a communication backbone that links businesses, individuals and nations in the global economy. This not only allows for greater communications within and between firms but also reduces business costs that have been in the past been a barrier to integration between economies. The World Information Technology and Services Alliance (WITSA) has estimated that the global marketplace for information and technology has grown to be worth almost $5 trillion USD. The surge in worldwide internet usage to four billion users highly the rapid spread of technologies across countries in recent years and the increasingly interconnected nature of the global economy. o

International division of labour, migration

Migration is the movement of people between countries on a permanent or long term basis. Labour markets differ from markets for goods and services, finance and investments in that they are far less international. This is because while money can be moved around the world in fractions of seconds, goods and services in days and investments in weeks, people do not move jobs as freely. Over the recent years more industrialized nations have become more restrictive about the immigration of people from poorer countries. Although this has happened more people than ever still move to different countries in order to take advantage of the better work opportunities that other

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countries have too offer. The International Labour Organization (ILO) estimates that around 164 million people have migrated to work in different countries of the world and that rising labour supply pressures and income inequalities could increase this level. Labour migration into OECD countries fell because of the reduced job opportunities following the GFC. While there are strong economic and financial incentives for migration, political unrest and conflict are also significant factors causing the movement of people. The movement of labour between economies appears to be concentrated at the top and bottom ends of the labour market. At the top end is the high skilled workers who are attracted to larger and higher income economies such as Europe and the US because of better pay and greater job opportunities. The ILO estimates that two thirds of international labour migration have moved to high income economies. Smaller advanced economies may experience a “brain drain” which is the movement of the most talented and skilled workers to other countries for greater rewards. This demonstrates the global market for high skilled labour. However, at the bottom end of the labour market, low skilled labour is also in demand in advanced economies where it is difficult to attract sufficient people born locally to do certain types of jobs. Jobs that only require basic skills and often filled by these migrants. These trends in migration reflect an international division of labour whereby people move to the jobs where their skills are need while the globalisation of the labour market is increasing but there are still significant barriers to working in other countries e.g. language, culture and incompatible education. The international division of labour is also evident from another aspect of the world economy – the shift of businesses between economies, rather than the shift of people. Just as people may move to countries in search of better job opportunities, corporations can also shift the production between economies in search of the most efficient and cost effective labour. In a globalized business environment, many producers operate what is called a global supply chain, with production facilities in several countries. The process called “offshoring” allows companies to shift production between countries and reduce costs. This results in export based economies that can compete on the basis of their abundance of low wage labour. The international division of labour reflects the economic concept of “comparative advantage”. Essentially, this theory states that economies should specialize in the production of the goods or services that they can produce at the lowest opportunity cost. Developing countries have a large population of workers with only basic labour skills and education levels, giving them a comparative advantage in labour intensive manufacturing jobs. 

The international and regional business cycle

Business Cycle – refers to the fluctuations in the level of economic growth due to domestic or international factors.

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Gross Domestic Product – The total market value of all final goods and serviced produced International Business Cycle – the fluctuations in economic activity on the global scale Regional Business Cycle – fluctuations in the level of economic activity in a geographical region of the global economy above time. The level of economic activity in individual economies is never constant. Economic growth is usually seen moving in cycles – in other words instead of sustaining a steady ...