Global Interdependance

Question 1

What effect did Covid-19 have on the global economy

Answer 1

The pandemic of 2020 was a sharp reminder of how we live in an increasingly interconnected world. The rapid spread of COVID between and within countries had devastating social and economic effects on every single nation. The world had plunged into its deepest economic contraction since the Great Depression of the 1930s.

To control the spread of the virus most countries imposed strict lockdowns causing many businesses to close and many people to lose their jobs. International and domestic borders were closed to prevent travellers from transmitting the virus.

It is important to remember that the benefit of a globalised community is that it enables a coordinated effort to develop and disseminate a vaccine more quickly than in a non-globalised world.

Question 2

What is Globalisation

Answer 2

Can be defined as the process by which the world is becoming increasingly interconnected. It is characterised by the growth in trade and international investment, and by the rapid movement of information and people around the globe

Question 3

Explain Linkages between economies

Answer 3

Economies are linked by more than just trade, there are movements in financial capital and movements in people such as tourists, workers, and immigrants. Exports contribute around 23 percent of Australias GDP and around 24 percent of Australian workers are directly involved in trade-related activities. Australian consumers are dependant on other countries for many goods and services such as clothes, tourism, electronics, and coffee.

International tourism has grown in importance due to improvements in transport and communications and ranks fourth in global exports. Tourism has also become a main source of foreign exchange for one-third of developing countries.

Australia is an outward-looking country that is strongly engaged with the rest of the world.

Question 4

Australias globally significant industries

Answer 4

Agricultural products - top 15 exporter
International tourism - 11th largest
Fuels and mining- 4th largest
Travel services- 4th largest exporter
Financial services- 9th largest exporter
Investment fund assets - 3rd largest

Question 5

Explain the patterns and trends in global trade

Answer 5

One of the key features of the modern era has been the rapid growth of world trade. (esp evident in the period before the global financial crisis of 2009). In periods when global trade has slowed, world economic growth has also been relatively weak.

World trade (exports + imports) as a percentage of GDP has increased from around 38 percent in 1991 to 60 percent by 2019. GDP per capita has experienced an even faster rate of increase more than doubling over this period. Economists believe that increased trade intensity is an important catalyst for both higher economic growth and living standards.

The main reason that world trade experienced such rapid growth after WW2 is partly due to the success of the world organizations such as the World Trade Organisation (WTO), the International Monetary Fund (IMF), and the World Bank in promoting the liberalization of world trade. It was also due to the improvements in transport and communication which drastically lowered the costs of international commerce.

Question 6

What countries dominate world trade?

Answer 6

The countries that dominate world trade are the US, China, and Germany, these three countries account for 30perfent of world merchandise exports. China is the world’s largest exporter, while the US is the largest importer.

Question 7

Factors that affect economic transactions between different economies

Answer 7

The exchange rate - movements in the exchange rate affect the price of exports and imports.

World economic growth - Australian exports are dependent on foreign demand. Increased economic growth in foreign countries will increase the demand for Australian exports.

Domestic economic growth - Australian imports are determined by domestic economic activity. Higher activity in Australia raises domestic income, increasing demand for imported consumer goods and services while increased investment will increase capital goods imports.

Relative inflation rates- if Australia’s inflation rate is higher than our trading partners it will reduce the competitiveness of domestic goods and increase the competitiveness of foreign goods.

Relative interest rates (interest rate diff)- if interest rates in Australia are relatively higher than other economies especially the US then financial capital will flow into the Australian economy.

Productivity & cost efficiency - the cost efficiency of domestic firms relative to foreign firms will determine their success in the global market. Productivity improves cost efficiency by increasing output per worker.

Question 8

What is international competitiveness?

Answer 8

It is an important aspect of globalization. The OECD defines the competitiveness of a nation as the degree to which a country can produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people.

Question 9

What are the drivers of international competitiveness?

Answer 9

Economic performance - domestic economy, international trade, inflation, and unemployment

Government efficiency - public finance, fiscal policy, business legislation, institutional framework

Business efficiency - productivity, labour market, finance, and management practices.

Infrastructure - Basic infrastructure, technological and scientific infrastructure, health and environment, education.

Question 10

What effect does international competitiveness have on a country’s economy?

Answer 10

International competitiveness affects a country’s ability to engage in international trade and will therefore have a positive effect on a country’s production and income.

A fall in competitiveness implies that goods and services produced within a country are having trouble finding buyers in both foreign and domestic markets. Competitiveness matters because it can affect a country’s standard of living.

Question 11

What are the determinants of international competitiveness?

Answer 11

Changes in labour productivity due to factors such as technology, education and training

Changes in a country’s price level (inflation) relative to its trading partners

Changes in a country’s price wages relative to its trading partners

Changes in the exchange rate

Question 12

Explain the determinants

Answer 12

Productivity measures how much output can be produced from a given input, such as labour. It is usually measured by dividing total production (GDP) by the number of hours worked. An increase in productivity will increase competitiveness. Real unit labour costs will fall if either productivity rises or wage costs fall. This will cause an increase in competitiveness.

To compare Australias exchange rates with other countries it is important to use a trade-weighted exchange rate rather than a single exchange rate such as the US Dollar. Australia’s trade-weighted index (TWI) measures the change in the value of the AUD relative to its trading partners. If the real TWI falls (a depreciation) then this implies an improvement in competitiveness since the price of Australis exports to overseas buyers will fall. An appreciation in the exchange rate will have the opposite effect, causing a decrease in competitiveness.

Question 13

Real-world link to international competitiveness (determinants)

Answer 13

Between 2010 and 2012 the TWI was relatively high due to the mining boom in Australia. After 2012 world commodity prices dropped bringing an end to the decade-long mining boom. As a result, the real exchange rate dropped majorly. Between 2013 and 2020, the real TWI depreciated by around 25%, boosting the competitiveness of the traded goods sector. Real unit labour costs remained relatively high in Australia up to 2015 before falling around 7% by 2020 also boosting competitiveness. (Australias trade balance has increased significantly over this period of improving competitiveness.

Question 14

What is globalisation?

Answer 14

Globalisation is one of the defining trends of the modern era. The term itself generally refers to the opening of international borders to the flows of trade, investment, immigration, information, and technology.

Question 15

Benefits of globalisation?

Answer 15

The many substantial globalisation benefits of globalisation include higher average incomes, greater innovation, richer cultural exchanges, and improved standards of living around the world

Question 16

Is globalisation positive?

Answer 16

Globalisation is often wrongly blamed for many of the world’s problems including climate change, world poverty, and environmental degradation. But this is a myth reported by those who are opposed to change and progress. What is an undeniable fact is that globalization has been responsible for creating unprecedented prosperity.

Question 17

Measures/indicators of globalisation

Answer 17

The key measurements of globalization that most economists focus on are trade in goods and services and financial capital flows. The most commonly used measure of a country’s trade openness is the ratio of a countries trade to GDP. This ratio has on average, increased quite markedly across all groups of economies, including both developed and developing countries. It represents a quick and simple measure of a country’s level of integration with the rest of the world.

The second main indicator of globalisation is the growth in foreign direct investment. Trade in financial capital is a more recent phenomenon than the trade in goods and services. This is because international financial transactions were relatively regulated in most economies until the 1990s.

Question 18

Factors facilitating globalisation

Answer 18

There are a number of important drivers of globalisation the first has been the liberalization of markets to the flow of goods, services, and investment. This process began after WW2 with the establishment of united nations organisations.

The second key factor driving recent globalisation is technology. Advances in transport and communication have resulted in ‘the death of distance’. Transport costs and travel time have been drastically cut helping boost the volume of merchandise trade and increase tourist travel to record numbers. Advances in information technology and the internet have enabled the growth of trade in services.

Multinational corporations (MNC) have also played an important role in promoting globalisation. MNC are very large firms with headquarters in one country and subsidiaries in one or more other countries. These firms establish production and/or retail distribution facilities in other countries.

Question 19

What are the effects of globalisation?

Answer 19

Globalisation is a controversial issue. On one side are the economic rationalists who argue that globalisation will improve economic welfare. On the other hand are the critics who argue globalisation while creating benefits for some, imposes costs on poorer countries and on disadvantaged workers. They argue it is making the rich richer and the poor poorer.

Negatives-

• Seen as favoring the rich
• Global poverty has not been reduced
• income inequality seems to have increased
• Reduces cultural diversity

Positives-

• Wider access to G&S
• Lower prices
• more and better-paying jobs
• improved health
• higher overall living standards
• increases economic growth

Globalisation unites people all over the world by promoting a common culture.