Topic 1: The Global economy

Question 1

Define: Gross World Product

Answer 1

The sum of total output of goods and services by all economies in the world over a period of time. GWP can be measured by adjusting an individuals nation’s output into $US or using purchasing power parities

Question 2

Define: Purchasing power parities

Answer 2

Relates to changes in price levels in two economies, making the output of the two nations comparable. it can measured in relative and absolute terms

Question 3

Define: globalisation

Answer 3

Refers to the process of integration between economies, leading to the emergence of a global market due to increased trade and financial flows. Thus, it has a significant impact of economic activity and growth within nations

Question 4

What are the major indicators of globalisation? (TIIFT)

Answer 4

1. Trade in goods and services: a measure of how goods and services produced in an economy are consumed in other economies around the world
2. Investment and transnational corporations: measures global investment
3. International division of labour (migration): A growing development in the global labour market is the outsourcing of work to economies with cheaper labour
4. Financial flows: the most globalised sector in the world, they enable countries to obtain funds that are used to finance their domestic investment
5. Technology and transport: technological developments facilitate the integration of economic, new information and communication. it drives globalisation

Question 5

Define: international business cycle

Answer 5

Where cycles of growth and decline in the global economy have a major impact on most of the economies in the world. The transmission of economic conditions from one country to another is made more immediate by the increased integration of economies during globalisation. However, the pattern and pact of economic growth differs between economies

Question 6

Identify factors that strengthen the international business cycle

Answer 6

• Trade flows
• Investment flows and investor sentiment
• Transnational corporations
• Financial flows
• Technology
• International organisations

Question 7

Identify factors that weaken the international business cycle

Answer 7

• Domestic interest rates
• Government fiscal policies
• Exchange rates
• Structural and regional factors

Question 8

Identify the basis of free trade

Answer 8

There are no government imposed impediments to the movement of goods and services between nations, therefore there are no restrictions to shield domestic producers. This idea is based on the argument that different nations have different comparative advantages

Question 9

What are the advantages of free trade (SACLIG)

Answer 9

1. Specialisation: it allows countries fo specialise in the production of goods and services, e.g. China specialises in cheap labour
2. Allocation of resources: encourages efficient allocation of resources
3. Competitiveness: improves international competitiveness
4. Living standards: leads to higher living standards
5. Innovation: encourages new innovations
6. Goods and services: allows countries to obtain goods and services that they cannot produce themselves or in sufficient quantities

Question 10

What are the disadvantages of free trades (DULE)

Answer 10

1. Dumping: production surpluses from some countries may be dumped (without protection domestic producers cannot compete with the large supply at such a low price)
2. Unemployment: increases unemployment and some domestic producers may find it hard to compete with imports
3. Less adv economies will able able to establish new business and industries as it would be more difficult
4. Environment: it may encourage environmentally irresponsible production methods

Question 11

What the role of the World Trade Organisation

Answer 11

The role fo the WTO is to implement and advance global trade agreements and to resolve trade disputes between economies. Its goal is to ensure that trade flows as smoothly, predictable and freely as possible by reducing protection and barriers to trade

Question 12

What is the role of the International Monetary Fund

Answer 12

Its role is to maintain international financial stability, particularly in relation to foreign exchange markets. Its goal is to foster global monetary cooperation, secure financial stability, facilitate international trade and promote high employment and sustainable economic growth

Question 13

What is the role of the World Bank

Answer 13

Its role within the global economy is primarily concerned with helping poorer countries with their economic development. Their two major goals is to reduce the rate of extreme poverty and reduce the inequality of fostering income growth for the world’s bottom 40%

Question 14

What is the role of the United Nations

Answer 14

The United Nations if a global organisation whose membership includes 193 members, where their aim is to promote peace and harmony across all nations

Question 15

What is the role of OECD

Answer 15

The role of the OECD is to promote policies to achieve the highest sustainable economic growth and employment in an environment where the standard of living is rising. It aims to maintain fiscal stability to contribute to the development of the world economy

Question 16

Define: Free trade agreements

Answer 16

A free trade agreement is an international treaty between two or more economies that are designed to break down barriers to trade between nations. In the past recent decades, regional trade agreements have multiplied from 27 to 482

Question 17

Define: Trading bloc

Answer 17

Occurs when a number of countries join together in a formal preferential trading agreement, to the exclusion of other countries

Question 18

Outline the advantages of free trade agreements

Answer 18

• Acts as a stepping stone towards free trade as it convinces economies to reduce their protection barriers against a small group f economies, then eventually internationally
• Agreements ensure ongoing prosperity. As there is uncertainty within economic conditions, international trade nations cannot assume the general trend in world trade being automatically open

Question 19

Outline the disadvantages of free trade agreements

Answer 19

• Leads to the formation of trading blocs which hinders progress towards global free trade as it can separate the world into different trading areas
• Can contribute to greater trade diversion
• Holistically it may not even benefit an economy as a nation can bind themselves to other inefficient nations
• Can cause geopolitical tensions

Question 20

Outline the role of a multilateral agreement Australia is a part of: APEC

Answer 20

APEC was formed in response to the formation of other trading blocs occurring in other areas and to promote sustainable economic growth and prosperity within the Asia-Pacific region

Question 21

Outline the role of a multilateral agreement Australia is a part of: CERTA

Answer 21

CERTA is an agreement between Australia and New Zealand that prohibits all tariff and export restrictions between each nation.

Question 22

Why is there a need for protection?

Answer 22

Protection is any type of government actions that has the effect of giving domestic producers an artificial advantages over foreign competitors, these include; tariffs, import quotas and subsidies

Question 23

Why is there a need to protect infant industries?

Answer 23

Infant industries need to be shielded from competitors as they may initially not have the funds and experience to compete internationally. Thus, protection in the short run will enable them to build capacity, establish markets and achieve economies to scale so they are able to compete with global economies in the long run.

Question 24

Why is there a need to protect domestic employment?

Answer 24

Protection assists and supports local jobs particularly in times of recession, if local producers are protected from competition with cheaper foreign imports, the demand for local goods will be greater, creating more domestic employment. However, in the long run protection must be phased out as it tends to allocate resources away from areas of more efficient production which may lead to higher levels of maintained unemployment in the long run.

Question 25

Why is there a need to protect domestic industries from dumping?

Answer 25

Dumping occurs when foreign firms attempt to sell their goods in another country’s market at unrealistically low prices, it typically occurs to dispose production surpluses of establish market position in another country. Domestic industries may not be able to compete with these producers which can lead to a loss in productive capacity and higher unemployment

Question 26

Briefly explain a tariff as a method of of protection

Answer 26

A tariff is a direct tax on imported goods which raises revenue for the government. In the short term, tariffs assists domestic producers compete internationally, thus stimulating domestic production and employment. However it can lead to a reallocation of resources towards less efficient producers and may cause a retaliation effect.

Question 27

Briefly explain subsidies as a method of protection

Answer 27

Subsidies involve financial assistance towards domestic producers, enabling them to reduce their selling price and compete more easily hence increasing domestic production and employment. However, subsidies may reallocate resources towards inefficient industries and impose direct costs on government budgets

Question 28

Briefly quotas as a method of protection

Answer 28

Quotas are a direct limitation on imported goods by controlling the volume of a good that can be imported over a given period of time. It helps stimulate domestic production and employment as producers are able to supply a greater quantity of the good, however it can lead to a decline in economic growth by redistributing income away from consumers to domestic producers. It does not directly generate revenue for the government

Question 29

Protection: what are local content rules?

Answer 29

Local content rules specify that goods must contain a minimum percentage (55%) of locally made goods, this forces manufacturers to use and support domestic goods and services

Question 30

Protection: what are export incentives?

Answer 30

Export incentives give domestic producers assistance through grants, loans or technical advice and encourages businesses to penetrate global markets or expand their market share

Question 31

What defines an economy as “advanced”?

Answer 31

Advanced economies typically have high income levels, larger service industries and advanced manufacturing. In the recent decades there has been slower economic growth, e.g. Australia

Question 32

What defines an economy as “developing”?

Answer 32

Developing economies typically have low income levels with about half its population in absolute poverty, they are heavily reliant on agriculture and in more extreme cases foreign aid. In recent decades they have faced moderate economic growth amongst a growing population, e.g. Yemen

Question 33

What defines an economy as “emerging”?

Answer 33

Emerging economies typically have varying income levels that have a fast growth rate, they industrialise usually with substantial manufacturing sectors, e.g. China

Question 34

What are the causes of global inequality? (PFTT)

Answer 34

• Protection: developing countries lack protection causing their lack of progress, thus they continue to be disadvantaged
• Foreign aid: the level of foreign aid is insufficient for the country to emerge
• Trade blocs: trading blocs exclude poorer nations and other nations don’t want to bind themselves to nations that will not benefit them
• Technology: developing economies are behind in their access to technology as they lack income for fees and thus can’t afford access to rights

Question 35

What are the causes of domestic inequality? (NEPLEC)

Answer 35

• Natural resources: are volatile in price on the global market and do not earn the country a stable income which can cause nations to become over reliant on a particular export
• Entrepreneurship: developing economies often don’s have a social system which promotes a spirit of entrepreneurship since they have a tighter market and lack of technology
• Labour: Countries that have large workforce and less capital/ land, then to produce thing requiring labour
• Economic institutions: developing economies often have military dictatorships or a corrupt government thus there are high levels of economic mismanagement
• Capital: developing countries often have high levels of foreign debt due to exploitation and corrupt banking