SECTION 1- INTERNATIONAL ECONOMIC INTEGRATION Flashcards
THE GLOBAL ECONOMY
- The integration between the economies of the world. Considers the sum of all economic activity of individual countries, and the interactions between them. This integration has increased in recent years, along with the process of globalisation.
ECONOMIC INTEGRATION
- Liberalisation of trade between two or more countries. Goods and services, labour and resources can move more freely between economies.
- We live in a global economy whereby economies of the world take advantage of increased economic integration to maximise output and efficiency. However, with increased integration comes increased risk such as financial contagion.
FINANCIAL CONTAGION
- When an economic disaster results in financial traders moving money out of affected or nearby areas/economies.
EG. Financial crisis in Greece has flow-on effects for European countries.
GROSS WORLD PRODUCT (GWP)
- The total value of g/s that are produced worldwide of a period of time measured in $USD for consistency. Used to measure the overall trend of growth or decline in the economy.
GDP AT PURCASING POWER PARITY (PPP)
- The total value of GWP in a given time period, adjusted for national variations in price and different exchange rates. Currencies are converted to be in equilibrium so prices can be compared accurately.
EG. According to the IMF’s world economic outlook from 2019, advanced economies represent 40% of the world’s GDP at PPP, but only contain 14% of world population. Emerging and developing economies account for 60% of world GDP at PPP, but contain 86% of the population.
In this case GDP at PPP allows a more accurate comparison of the economic performance of different economies, revealing the displacement of income across the world. This is because a relatively smaller number of advanced economies dominate global production, compared to the larger number of emerging and developing economies.
GLOBALISATION
- Refers to the integration removal of barriers between economies, leading to the emergence of a global marketplace.
The forces driving globalisation according to the World Bank include:
- NEW MARKETS
- NEW ACTORS
- NEW RULES AND NORMS
- NEW TOOLS AND COMMUNICATION
Force 1: New markets
- Growth of global markets in services, such as finance and international transportation, motivates deregulation of financial markets and antitrust laws. This ensures such markets continue to grow rapidly and expand internationally, facing increased competition, innovation and opportunity.
Force 2: New Actors
- The growth of multinational corporations (MNC’s) has caused reformations to global supply chains, where supplies are commonly sourced internationally to take advantage of cheaper inputs. This has increased supply chain links and global integration.
- The WTO has also been an instrumental actor in facilitating globalisation, as they govern free and fair trade internationally. Non-government organisations which provide foreign aid, trading blocs and organisations, government economic forums also facilitate global policy coordination and communication.
Force 3: New rules and Norms
- With the increased spread of democracy, human rights awareness, action agendas for developing countries, and market-based economic policies, governments of the world have sought greater global communication and integration.
- EG. The creation of multilateral and bilateral agreements has facilitated greater global trade links.
Force 4: New tools and communication
- The internet, and the increase in use of electronic communication and international transportation has facilitated an increase in efficiency of global communication.
The major characteristics of globalisation that account for its rapid spread across the globe:
1.TRADE IN GOODS AND SERVICES
2.FINANCIAL FLOWS3.
3. INVESTMENT AND TRANSNATIONAL CORPORATIONS (TNC’s)
4.TECHNOLOGY, TRANSPORT AND COMMUNICATION
5. INTERNATIONAL DIVISION OF LABOUR, MIGRATION
- TRADE IN GOODS AND SERVICES
*International trade of goods and services is an important indicator of globalisation because it is a measure of how g/s produced in an economy are produced in other economies around the world.
Trade in g/s has increased dramatically in recent decades, from 38% of global output to 50% in 2018.
*Increased trade flows occur as economies become more linked- though increasing trade agreements in international and regional trade groups, and decreased domestic production- (economies do not produce all items and import goods to increase efficiency.)
*Composition of trade is continually changing due to demand for different goods and services.
EG. Global trade is currently dominated by manufactured goods- (vehicles, clothing, electronics)
Trade in services (finance and communication) is the fastest growing, = 2/3 of global output.
*Direction of trade flows has also changed in recent decades, reflecting the importance of economic regions.
EG. Fast growing Asia-pacific economies experienced the most rapid increase in trade: rising from 6% to 20%.
- FINANCIAL FLOWS
*Finance is the most globalised sector of the world economy because money moves more quickly than goods and services / people.
*Growth in financial flows is evidenced by growth in -foreign currency markets, -financial securities trade, -capital flows.
*The main drivers of financial flows include;
Financial deregulation:
EG. Australia floated the dollar in 1983, lifting many restrictions on the flow of the Australian currency globally.
Speculators:
Investors buy/sell financial assets with the aim of making profits from short term price movements. Increased number of financial transactions has increased volatility worldwide. EG. Forex daily turnover has increased from $4trn in 2010 to $6.6trn in 2020, causing a 40% increase in trading volume over the past decade.
*Financial exchange enables countries to obtain greater investment finance to expand operations and output. However, increased financial flows also increase the risk of contagion.
EG. During the GFC, there was a fall in activity financial markets due to the increased risk aversion of lenders, cost of credit and increased volatility. This led to total activity on global capital markets falling by approx. US$1000 from 2008 to 2009.
- INVESTMENT AND TRANSNATIONAL CORPORATIONS
Foreign direct investment (FDI), (Measures the globalisation of investment.)
*The movement of funds between economies for the purpose of establishing a new company or buying a substantial proportion of shares in an existing company (10% or more.) FDI is generally considered to be a long-term investment and the investor normally intends to play a role in the management of the business.
*Has traditionally favoured developing nations- with greater industrial capacity and larger consumer markets, they have been the natural destination for foreign investment.
* Majority directed to Asian economies- $307bn to China.
TNC’s
*Plays a vital role in global investment flows accounting for half of global trade.
*Investment made by Transnational corporations (TNC’s) involves the expansion of businesses globally in hopes of reaching a larger market and making greater profits.
*Brings new technologies, skills and knowledge to different countries. Govts often encourage them through tax concessions and subsidies.
*The global expansion of TNC’s has been prevalent in manufacturing industries, where countries can take advantage of cheap resources from around the world, and low labour costs to maximise the efficiency of their supply chains. (Can lead to exploitation.)
