Topic 1 Flashcards
The Global Economy
Gross World Product (GWP)
total amount of goods and services produced worldwide each year
Purchasing Power Parity (PPP)
an adjustment for national variations in prices and currency exchange rates
is used to make more accurate comparisons- ex. if price of goods and services is low relative to US prices then GNI will underestimate true incomes of people in developing countries
Globalisation
the ***rapid movement of four things around the global economy: goods and services money ideas people
Measurements of globalisation (MCFIT)
migration and international division of labour communication technology transport financial flows investment flows trade flows
Foreign Direct Investment FDI
investing in a new business or buying 10%+ of an existing one
International business cycle
fluctuations in the level of economic activity in the global economy over time
Regional business cycle
fluctuations in the level of economic activity in a geographical regions of a global economy over time
Free trade
when governments do not impose any artificial barriers on imports on exports
Protection
any artificial barriers to trade
Tariffs
+Effects
government imposed tax on imports.
has effect of raising the price of imported goods, making the domestic producer more competitive
Quotas
+Effects
controls the volumes of goods that is allowed to be imported over a given period of time.
imported quotes guarantees domestic producers a share of the market
Subsidies
+Effects
involves financial assistance to domestic producers, which enables them to reduce their selling price and compete more easily with imported goods
Local content rules
specify that goods must contain a minimum percentage of locally made parts
Export incentives
Any technical or financial assistance to encourage domestic firms to increase exports
assistance such as grants, tax
deductions, loans or technical advice
Absolute Advantage
ability to produce the most goods with your given resources
Comparative Advantage
produce goods and services with lowest opportunity cost
Specialisation
dedicating resources to a specific industry (one with comparative advantage) **Ricardian theory
Trade Liberalisation
advantages Macro: material standard of living variety cost Micro: Efficiency in resource allocation
disadvantages Dumping Unemployment Discouraging infant industry Narrow economic base cant diversify inequality negative externalities
Free Trade Area
countries abolish protection barriers against countries
Customs Union
features of free trade area + common barriers against foreign nations
Common Market
has some features of customs union + free movement of capital and labour
Monetary Union
same features of common market + common currency and central bank
Multilateral Trade Agreement
free trade between more than 2 countries
Trading Bloc
to exclusion of other nations
Regional Trade Agreement
multilateral in same area
Trade Diversion
trade agreement causes less efficient economies for that good or service to import = support of less efficient goods
Trade Creation
free trade agreements increases the total amount of trade
World Trade Organisation (WTO)
objectives:
facilitate free trade agreements –> by having rounds
resolve trade disputes –> by fielding complaints
limitation:
hard to negotiate due to large amount of members
preferences developing nations
ex. uruguay round, doha round
International Monetary Fund (IMF)
objectives:
global financial stability –> liquidity loans to assist countries experiencing balance difficulties
international monetary cooperation (expansion of int. trade, exchange rate stability, multilateral payments system) resources to members experiencing economic crisis –> $ from quota drawing (special drawing rights)
monitoring international financial system
limitation:
loans require conditions (austery measures)
ex. global financial crisis, asian financial crisis
World Bank (WB)
objectives:
assist in economic development –> providing loans/ technical advice to developing nations
reducing rate of extreme poverty to > 3% of 2030’s world population
reducing inequality by raising income levels for lowest 40% of income earners
limitation:
need money- funded by contributions from member countries + from its own borrowings in global financial markets
loans to developing nations –> developing nations in debt
ex. global financial crisis, indonesia
Reasons for protection
infant industries
prevention of dumping
protection of short term domestic employment
defence- military self sufficiency
Effects of protectionism
macro: decrease in growth and living standards
misallocation of resources –> allocate inefficency
inflation (tariffs + quotas)
decrease in export revenue
reduce trade between nations
harder to for economies specialise
micro:
rent seeking behaviour –> lobby gov for protection = inefficient
decrease in competition = decrease in innovation and decrease in productivity growth
Global impact:
agriculture
worse for developing countries
Transnational corporations
enterprises that manage production or deliver services in more then one country
global enterprises that dominate global product and factor markets. They have production facilities in at least two countries and are owned residents of at least two countries.
Global Finance
vs
Global Investment
finance: shorter term, speculative shifts of money
investment: longer term, flows of money to buy or establish businesses as investments
United Nations
189 countries
assist developing countries with improving their level of development
hard to pass resolutions in security council
OECD
35 countries (democratic market economies) promote sustainable economic growth and development in both member nations and global economy
G7/G8
G7 (exclude russia bc crimea)
largest democratic market economy
coordinate macroeconomic policy esp. fiscal
limitation: euro-centric bunch of nations
G20
recently increased in economic significance
infrastructure, food security and upcoming- cryptocurrency and unemployment
GFC:
stimulus macroeconomic policy
pledge $1 t to crisis affected economies
European Union (EU)
28 countries worlds most important trading bloc about 33% of world trade Common agricultural program (CAP)- subsidies agriculture= 40% of budget Joint currency Single unified market **can create trade diversion
Asia-Pacific Economic Cooperation (APEC)
21 countries
about 54% of world GD and 44% of world trade
agreed not to exclude outside nations
North American Free Trade Agreement (NAFTA)/ US Mexico Canada Agreement (USMCA)
usa canada mexico
13% if world trade
increase trade between members (allows US to increase exports to other 2)
quotas on motor vehicle parts coming other 2
usa production facilities move to mexico
updates
implemented rule of origin- 75% of components
better
better access to canada’s dairy + intellectual property
Association of South East Asian Nations (ASEAN)
counterweight to APEC
free trade area
Difference between economic growth and economic development
Economic growth refers to the increases in a country’s real GDP over a specific time period
Economic development is a broad measure of welfare in a nation that includes indicators of health, education and environmental quality as well as material living standards
Distribution of income and wealth
How equally spread income and wealth is shared amongst the
members of a nation
Income: Rewards from labour
Wealth: Assets
Inequality because not shared equally
Income and quality of life indicators
inflation adult literacy rate foreign aid energy consumption domestic savings primary education life expectancy doctors per 100,000 people fertility rate
Reason for differences between nations
this highlights the concept of international convergence
While there is still a large gap between the living
standards of richer and poorer countries, this gap appears to be closing over time
Composition of Trade
mix of goods and services
Direction of Trade
Where trade is going - impact on individual economy
Speculators
Investors who buy or sell financial assets with the aim of making profits from short term price movements. They are often criticised for creating excessive volatility in financial markets.
Advantages and disadvantages of multilateral /bilateral agreements
**chart
Measure of globalisation of investment
Foreign direct investment
3 things TNCs bring
Foreign investment, new technologies and skills
2 things that strengthen the international business cycle
Technology
Financial flows
2 things that weaken the international business cycle
Exchange rates
Domestic interest rates
Most distributing feature of global economy is ..
Large differences in living standards
Method for comparing living standards
Gross National Income
Human Development Index (HDI)
+measurements
A measure of economic development devised by the United Nations Development Program
Life expectancy at birth
Educational attainment
Gross National Income per capita
Gross National Income (GNI)
sum value of all domestic production and receipts of primary income from foreign sources
Advanced economies
high levels of economic development,
high income levels
close economic ties with each other that have liberal-democratic political/economic institutions
Emerging economies
in process of industrialisation and experiencing sustained high levels of economic growth
Causes of global inequalities
global trade system
global financial architecture
global aid and assistance
global technology flows
Causes of global inequalities
domestic factors
economic resources: natural resources labour supply and quality access to capital and indebtedness entrepreneurial culture
institutional factors:
political and economic institutions
economic policies
government responses to globalisation
Global trade system factors
Wealthy countries protect agriculture as the high income levels make it less competitive
OECD nation consumers and governments pay $250 billion annually for agricultural subsidies
This is $250 billion that could have been received by agricultural exporters in developing nations attempting agrarian reforms
Trade blocs
Doha Round lack of cooperation
Global financial architecture
Short term finance favours emerging (high returns)
Long term investment favours developed
Developing have high debt burdens
Returns often worsen inequality as it goes into the hands of the wealthy
Global aid and assistance
‘phantom aid’ wasted on administrative costs
Distributed w/ political considerations
Some OECD countries, including Aus, are not meeting their foreign aid target of 0.7% of GDP
Global technology flows
Richer countries have the infrastructure to facilitate new technology
Expense makes it harder for poorer nations to use
As they are created in developed economies, they are geared to the needs of high income countries
Economic resources
Natural Resources
Oil rich countries have achieved high growth rates – Dutch Disease
Labour supply and quality
Education/productivity/motivation
Access to capital and indebtedness
Difficulty in gaining capital for investment low savings
Entrepreneurial Culture
Little incentive to operate in developing countries
innovation, work ethic
Institutional factors
Political institutions
Economic policies of domestic government
Government responses to globalisation
The Consumer Price Index (CPI)
a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care
It is calculated by taking price changes for each item in the predetermined basket of goods and averaging them
Impacts of Globalisation (7)
- International convergence
- Economic growth/development (unequal)
- Increased trade, investment and TNCs
+FDI fuels eco growth - Environmental consequences
developing countries = seek environmental degradation
globalisation increased international awareness of environment issues - Financial Markets
Floating exchange rates and deregulating domestic banking sectors
Allows misuse of funds (inefficient allocation of resources)
Primarily benefits wealthy - International business cycle
Growth through trade/specialisation/population growth
Means countries are exposed to events in region (e.g. Greece and EU countries) - Shared ideas and technology
CERTA
8% avg increase in trade
harmonization of business regulations and laws
CHAFTA
99% of aus exports
soon enjoy duty-free entry
Developing economies
low levels of economic development,
low income levels
