1. The Global Economy

Question 1

What is the global economy?

Answer 1

The global economy refers to the international exchange of goods and services.

Question 2

What is GDP?

Answer 2

The collective value of goods and services in the global economy at any given time known as gross world product.

Question 3

Define globalisation.

Answer 3

Globalisation refers to the integration between various nations and the increased impact of international influences on all aspects of life and economic activity.

Question 4

Define trade in goods and services.

Answer 4

It is the measure of how goods and services produced in an economy are consumed in other economies around the world.

Question 5

Describe the direction of trade flows over the past decade.

Answer 5

Western ‘high-income’ economies have seen a reduction in global trade manufacturing exports, compared to the increase in East Asian and Pacific economies.

Question 6

Provide statistics/data on trade flows over the past decade.

Answer 6

• Trade has grown rapidly in recent decades increasing from US $6 trillion in 1987 to over US $42 trillion in 2017. - GWP is over 50x its level in 1960

Question 7

Outline the role of financial flows in the global economy.

Answer 7

• The globalisation of finance has had a major impact in terms of linking economies around the world - Finance is the most globalised sector of the world economy because money moves between countries quicker than goods and services. - Main drivers of global financial flows are speculators or currency traders who shift billions $ in and out of financial markets worldwide to undertake short-term investments in financial assets.

Question 8

Outline the role of TNCs in global investment flows.

Answer 8

• TNC’s facilitate the globalisation of investment through FDI flows - They often perform various business functions around the world, providing employment and domestic investment e.g Apple’s production process is undertaken in China whilst marketing is in the US.

Question 9

Outline the role of technology in globalisation

Answer 9

• Technology facilitates the integration of economies, through technological advances in areas such as transport and communication. For example: - Advances in transportation such as aircraft and high-speed rail networks allow greater labour mobility between economies. - International communication through high-speed broadband allows for the provision of commercial services to customers around the world. - In finance and investment, technology allows money to move around the world in a fraction of a second.

Question 10

Refer to the international division of labour in relation to high and low skilled employment.

Answer 10

• Highly skilled workers are attracted to developed income economies such as the US due to better pay and more job opportunities - Low skilled workers turn to developed economies to fulfil the work tasks that attract few people domestically and pay little income.

Question 11

Describe to the relationship between migration and the international division of labour. Make reference to the barriers restricting overseas employment.

Answer 11

• Trends in migration reflect the international division of labour as people move to the areas where their skills are required most. - The globalisation labour increasing but there are still significant barriers to working overseas. E.g immigration restrictions, language and cultural factors.

Question 12

What is the international business cycle?

Answer 12

The international business cycle refers to fluctuations in the level of economic activity in the global economy overtime.

Question 13

Outline factors that strengthen the international business cycle.

Answer 13

• Trade flows - Investment flows - TNCs - Global interest rates - Commodity prices

Question 14

Outline factors that weaken the international business cycle.

Answer 14

• Domestic interest rates - Fiscal policies - Exchange rates - Domestic economic policies

Question 15

What is the regional business cycle?

Answer 15

The term regional business cycle refers to the changes in economic activity in a particular region.

Question 16

Outline the advantages of free trade.

Answer 16

• Trade allows countries to obtain goods and services that they cannot produce themselves - Free trade allows countries to specialise in the production of the goods and services in which they are most efficient. - Specialisation facilitates economies of scale, lowering average costs of production while increasing efficiency and productivity. - Free trade encourages the efficient allocation of resources. Resources will be used more efficiently because countries are producing the goods in which they have a comparative advantage.

Question 17

Outline the disadvantages of free trade.

Answer 17

• An increase in unemployment as some domestic businesses may find it hard to compete with foreign competitors. - It may be more difficult for less advanced economies to establish new firms and new industries if they are not protected from larger foreign competitors. - Free trade may encourage harmful environmental production methods as producers may win markets by undercutting competitors’ prices - only because they also undercut environmental standards.

Question 18

Outline the role of the World Trade Organisation (WTO).

Answer 18

The role of the WTO is to implement and advance global trade agreements and to resolve trade disputes between economies.

Question 19

Outline the role of the International Monetary Fund (IMF).

Answer 19

The IMF aims to maintain international financial stability and by monitoring the economic policies of its 189 members. The IMF’s policies are to support the free trade of g&s and the free movement of finance and capital throughout world markets.

Question 20

what are structural adjustment policies and why are they used?

Answer 20

Structural Adjustment Policies are economic policies which countries must follow in order to qualify for World Bank or IMF loans. They also encourage nations to adopt economic reforms and assist them in making debt repayments on the older debts owed.

Question 21

Outline the role of the world bank.

Answer 21

The WB help poorer countries with economic development. WB fund investment in infrastructure, reduce poverty, and help countries adjust their economies to the demands of globalisation. The world bank is funded by contributions from member countries and its own borrowings in global financial markets.

Question 22

Outline the role of the United Nations (UN).

Answer 22

Established by 51 (now has 193) countries post WW2, their main role is to preserve international peace and security. They also promote social progress, better living standards and human rights.

Question 23

Outline the role of the Organisation of Economic Cooperation and Development (OECD).

Answer 23

Main role is to conduct and publish research on a wide range of economic policy issues and to coordinate economic cooperation among member nations, such as towards the development of common policy agendas.

Question 24

What is the influence of government economic forum the G20?

Answer 24

The G20 includes 19 of the world’s largest economies plus the EU, covering 80% of world GDP and two-thirds of the world’s population - Australia is apart of the G20. It coordinated fiscal stimulus and took steps to improve supervision of the global financial system and international financial institutions during the GFC. However, international economic cooperation has weakened in more recent years and the G20 has played only a small role in coordinating efforts around global economic issues.

Question 25

What is the influence of government economic forum the G7/8?

Answer 25

Where considered the G7 til Russia quit permanently in 2017. The G7 has been the unofficial forum coordinating the global macroeconomic policy because of its influence over the fiscal and monetary policies of the world’s largest economies. Because of the G7 status as the forum for the world’s most powerful economies, it’s agenda has often included general political issues and current priorities such as climate change, global poverty and security.

Question 26

What are trading blocs?

Answer 26

A trade bloc is a type of intergovernmental agreement, where barriers to trade are reduced or eliminated among the participating states. They can lead to lower prices, increased export potential, higher growth & economies of scale. Accounting for 16.5% of global imports and exports, the European Union is the world’s largest trading block being a trading partner to over 80 countries. However, free trade does create winners and losers - with some domestic industries losing out to lower-cost imports.

Question 27

What are currency unions?

Answer 27

In a currency union, two or more countries share one currency or agree to fix their exchange rates at a certain level. The goal is to synchronise monetary policy and manage it centrally. Not only do participants use the same currency, but they let one central bank manage the currency and monetary policy for all of the countries.

• The largest currency union presently is the Eurozone. Euro is shared across 19 member states.

Question 28

Describe the EU trade agreement.

Answer 28

The European Union (EU) is a trade agreement between 28 member countries. The overall function of the European Union is to implement laws and regulations that integrate the member states of the EU. This is done by breaking down barriers to trade and borders, promoting free trade between members.

Question 29

Describe the APEC trade agreement.

Answer 29

Asia-Pacific Economic Cooperation (APEC) is a regional economic forum established in 1989 to leverage the growing interdependence of the Asia-Pacific. The agreement, although has had a relatively minor role in advancing free trade in the last 3 decades, has been promoted to increase it. Since its inception, APEC has worked to reduce tariffs and other trade barriers across the Asia-Pacific region, creating efficient domestic economies and dramatically increasing exports.

Question 30

Describe the USMCA (NAFTA) trade agreement.

Answer 30

The US-Mexico-Canada (USMCA) is a 3 country trade deal previously known as the North American Free Trade Agreement (NAFTA). NAFTA contributed to the value of trade, more than tripling between the 3 economies in the 25 years after it’s introduction. The USMCA is aimed at creating a more balanced trade that supports high paying jobs for Americans and grows North American economies.

Question 31

Who are the ASEAN and AANZFTA trade groups?

Answer 31

The Association of Southeast Asian Nations (ASEAN) group covers emerging and developing economies in South-East Asia. The ASEAN-Australian-New Zealand Trade Area (AANZFTA) came into effect in 2010 with ASEAN committing to lowering and eliminating tariffs on 96% of Australian exports to the region (compared to 67% prior to the agreement) in turn, increasing the ability to trade.

Question 32

Who are the CP-TPP/ TPP-11?

Answer 32

The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (known as both CP -TPP and the TPP-11) is a multilateral trade agreement among 11 Pacific Rim countries. The TPP-11 has significantly affected global trade through its extensive provisions to lower 18 000 tariffs (representing over 98% of all tariffs in the free trade area).

Question 33

What are the reasons for protection?

Answer 33

• Infant industry argument
• Protection of domestic employment
• Prevention of dumping
• Defence and self sufficiency

Question 34

What is the infant industry argument as a reason for protection?

Answer 34

Infant industries are those incapable of keeping up with foreign competition. They may need to be shielded from competitors in the short-term, allowing them to establish themselves within the market. The Infant industry argument is whether industry protection is removed over time. If protectionists policies are not removed, there will be no real incentive for the industry to reach a level of efficiency that would enable it to compete without protection.

Question 35

Describe the argument for protection on domestic employment.

Answer 35

One of the most popular arguments in favour of protection is that it saves local jobs. The gov can protect local producers from foreign competition by increasing the cost of importing. This will generate greater demand for local goods (as they are cheaper to purchase), in turn, creating domestic employment. However, there is little support amongst economists for this argument. Protection tends to distort the allocation of resources in an economy away from areas of more efficient production towards less productive areas. In the long run, this is likely to lead to higher levels of unemployment and lower growth rates.

Question 36

Describe the argument for protection on the prevention of dumping.

Answer 36

Dumping occurs when foreign firms attempt to sell their goods in another country’s market at artificially low prices. Local firms that could normally compete with such foreign producers may be forced out the market, causing a loss in a country’s productive capacity and higher unemployment. The only gain from dumping is that it results in lower prices for consumers in the short term, but this does not last as foreign producers will put up their prices once the local competition is eliminated.

Question 37

Describe the argument for protection in relation to defence and self-sufficiency.

Answer 37

Countries sometimes have non-economic reasons for wanting to retain certain Industries. For example, major powers generally want to retain their own defence industries so that they may be confident in a time of war. A similar argument can be made for self-sufficiency of food supplies. For example, even though Japan is highly inefficient in producing its own food supplies, it retains very high tariffs on rice imports because it wants to retain its own food supply.

Question 38

What are the methods of protection?

Answer 38

• Tariffs
• Subsidies
• Quotas
• Local content rules
• Export incentives

Question 39

What is a tariff and what is its effect on domestic markets?

Answer 39

A tariff is a government-imposed tax on imports. It has the effect of raising the price of imported goods, making domestic producers more competitive.

Effect on domestic markets:

• Domestic producers supply a greater quantity of the good -stimulating domestic production and employment.
• More domestic resources are attracted to the protected industry. This leads to a reallocation of resources towards less efficient producers.
• Consumers pay a higher price and received fewer goods on those being imported from overseas.

Question 40

What is a subsidy and what is its effect on domestic markets?

Answer 40

Subsidies are cash payments from the government to businesses to encourage the production of a good or service and influence the allocation of resources in an economy. Subsidies are often granted to businesses to help them compete with foreign competition.

Effect on domestic markets:

• Domestic producers supply a greater quantity of the good - the subsidy stimulates domestic production and employment in the protected industry.
• Consumers pay a lower price and receive more goods - although indirectly pay for the subsidy through tax.
• Subsidies impose direct costs on government budgets. This means that governments have fewer resources to allocate to other priorities such as education and healthcare.

Question 41

What is a quota and what is its effect on domestic markets?

Answer 41

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.

Effect on domestic markets:

• Domestic producers supply a greater quantity of the good - quota stimulates domestic production and employment in the protected industry.
• Unlike tariffs, quotas do not directly generate revenue for the government. However, governments can sometimes raise a small amount of revenue from quotas by administering the quota through selling import licences allowing firms to import a limited number of goods.
• Quotas do not directly generate revenue for the government. However, governments can sometimes raise a small amount of revenue from quotas by administering the quota through selling import licences or tariff quotas.

Question 42

What are tariff quotas?

Answer 42

Countries sometimes use a system of tariff quotas. Under this protectionists method, goods imported up to the quota pay the standard tariff rate whereas goods imported above the quota pay a higher rate.

Question 43

What are local content rules and what is their effect on domestic markets?

Answer 43

Local content rules specify that goods must contain a minimum percentage of locally made parts. In return, for guaranteeing that a certain percentage of a good will be locally made, the imported components may not attract a tariff.

Effect on domestic markets:

• Prevents foreign completion from exporting as they will have to increase their costs to comply with the local content rule, therefore this creates favourable conditions for domestic producers as they have less foreign competition.

For example - If there is a local content rule stating 20% of Australian inputs must be used in the production of iPads in China - Australian inputs are usually more costly, this will increase the cost of production for the Chinese manufacturer and therefore it is likely to deter them from exporting to Australia. In turn, if china does choose to comply with the local content rule, they will be forced to increase their price on Australian consumers to cover additional costs from using 20% of Australian produced resources.

Question 44

What are export incentives and what is their effect on domestic markets?

Answer 44

Export incentive gives domestic producers assistance such as grants, loans or technical advice (such as marketing or legal information). They encourage businesses to penetrate global markets or expand their market share.

Effect on domestic markets:

• Export incentives encourage domestic producers to expand their market share through government assistance. This puts them in a better position to compete with foreign exporters, therefore, reducing the risk of domestic industries shrinking or being put out of business entirely. In doing so, the government is indirectly supporting employment, by protecting domestic firms that provide jobs for workers.

Question 45

What are the effects of protectionist policies on the domestic economy in the short and long term?

Answer 45

In the short-term - protectionist policies can allow ‘infant industries’ to expand their scale and reduce their production costs so that they can compete with overseas producers.

In the long run - protectionist policies are likely to reduce living standards in an economy, as they tend to distort the allocation of resources away from efficient areas towards areas of less efficient production. This is likely to lead to higher levels of unemployment and lower growth rates.

Question 46

What are the effects of protectionist policies on the global economy?

Answer 46

Global protectionist policies have the overall effect of reducing trade between nations. Protectionism may reduce living standards and global economic growth by shielding inefficient producers. A major study released by the IMF concluded that over the medium term, countries that raise tariffs experience lower output, weaker productivity, increase unemployment and inequality. In addition, because tariff increase trend to lead to an exchange rate appreciation, they do not improve the balance of trade.

Question 47

What is the difference between economic growth and development?

Answer 47

Economic growth is the increase in the inflation-adjusted market value of the goods and services produced by an economy over time - measured through GDP; while economic development is the process by which the well-being and quality of life of a nation, region or local community are improved - evaluated through quality of life indicators including literacy rates, general health levels and life expectancy, measured by the Human Development Index (HDI).

Question 48

What is meant by the distribution of income?

Answer 48

Income distribution is the equality with which income is dealt among members of society. Income inequality refers to the degrees to which income is unevenly distributed among people in the economy. The degree of unevenness can range from a high level of equality, where people receive a similar share of income, to a high level of inequality where there is a large gap between high and low-income earners.

Question 49

What is meant by the distribution of wealth?

Answer 49

Wealth refers to the value of assets owned by a household. A newer trend in wealth inequality is the growing inequality between generations. The huge increase in residential land prices in Australian cities during the past two decades has widened the gap between older age groups - who bought into housing in previous decades - and younger ages groups - who are struggling to purchase homes and apartments.

Question 50

When measuring income and quality of life indicators, what specifically does the HDI take into account?

Answer 50

• Life expectancy at birth - This is indicative of the health and nutrition standards in a country.
• Levels of educational attainment - Education is important for the development of the skills of the workforce and the future development potential of an economy.
• Gross national income per capita - This is used as a measure of a decent standard of living and is an essential determinant of the access that people have to goods and services.

Question 51

What are the characteristics of a developing economy?

Answer 51

These countries generally have low-income levels, human resources with poor education and health outcomes and have only experienced a limited extent of industrialisation. The major consequence is that developing Nations have large numbers of people living in absolute poverty (defined as less than $1.90 per day in 2011 US dollars).

Question 52

What are the characteristics of an emerging economy?

Answer 52

These economies are in the process of industrialisation or modernisation and are experiencing sustained high levels of economic growth. the classification includes a range of economies that are neither high-income, nor share the traditional characteristics of developing economies.

Question 53

What are the characteristics of an advanced economy?

Answer 53

These countries have high levels of economic development and close economic ties with each other. The 40 advanced economies identified by The International Monetary Fund make up most of the high-income economies in the world. High-income countries have gross national income per capita levels above US$12,055 and are mostly found in North America and Western Europe, with a smaller number in the Asia-Pacific region.

Question 54

What are the reasons for differences between nations?

Answer 54

• Natural resources - Economies that have a reliable supply of cheap natural resources have better opportunities for economic development than those that do not. However, countries that rely on natural resource exports are exposed to downturns in commodity prices which can result in sudden decreases in national income.
• Labour supply and quality - High-income countries tend to have highly educated and skilled labour resources, low-income nations are characterised by high population growth, lower levels of educational attainment and low health standards which results in lower productivity levels.
• Access to capital and technology - Difficulty in gaining access to capital for investment contributes to a lower rate of economic growth as firms are generally less efficient/productive.
• Entrepreneurial culture - Refers to the entrepreneurial ability of the workforce and the willingness of workers to take risks in the business world. High levels of entrepreneurial ability are beneficial to the economy as new businesses increase competition, provide employment and lead to innovation.

Question 55

What are the effects of globalisation?

Answer 55

• Developing economies have more opportunities to grow by producing goods for global consumer markets
• Economies have greater access to new technologies and foreign investment.
• Globalisation has had adverse effects on the environment. To satisfy the demand of global consumers, firms increase their levels of production which often results in an increase in pollution and waste levels; thus, causing adverse effects on the environment.

Question 56

Refer to Trade, Investment and TNC’s in relation to globalisation.

Answer 56

• globalisation resulted in substantial increases in the size of trade flows and FDI.
• International trade in G&S continues to grow and is now equal to approx 2/3 of global output.
• Between 1990-2014 FDI increased more than 7x
• The removal of restrictions on foreign ownership and the development of global markets increased the growth of TNCs to now over 105,000.
• 2014 - foreign affiliates of TNCs accounted for 1/3 of total world export & employed 75m people.
• They are influenced by improvements in freight technologies, financial system (increased reliance on foreign sources for investment) and changes in gov policies (trade liberalisation).

Question 57

Refer to environmental sustainability in relation to globalisation.

Answer 57

Positives of globalisation:

• Facilitated the innovation of new technologies to improve energy efficiency and reduce pollution.
• Offers an opportunity for the costs of environmental preservation to be shared among economies.

Negatives of globalisation:

• Growth in global trade increases the consumption of non-renewable fuels for transport by air, road, rail and sea.
• Low-income countries may engage in harmful environmental practices for monetary gain, in an attempt to attract foreign investment or higher export revenue.

Question 58

Refer to the relationship between the international business cycle and globalisation.

Answer 58

• globalisation led to the emergence of the international business cycle - this means more countries around the world are experiencing similar periods of growth and decline.
• Integration allows countries to achieve faster rates of economic growth - however, also makes them more exposed to downturns.
• Greater synchronisation of business cycles between countries increased the need for macroeconomic policies to be coordinated.