Topic 1 - The Global Economy

Question 1

Distinguish between ‘The Global Economy’ and ‘Globalisation’.

Answer 1

Global economy = The INTERACTIONS between international economies linked together into one larger economic system, measured through GWP.

Globalisation = The INTEGRATION between different economies and the increased impact of international influences on HDI and FDI flows.

Question 2

List the 5 main indicators/influences of economic integration between countries.

Answer 2

1) International trade in Goods and Services

2) International financial flows

3) Investment flows and transnational corporations.

4) Technology, transport, and communication

5) International division of Labour

Question 3

Differentiate the growth in GWP between (AE’s) vs (D/E E’s).

Provide 2020 stat due to COVID-19.

Answer 3

Advanced Economies face low, but stabilised economic growth due to having access to greater borrowed funds, technology and capital.

D/E Economies face longer periods of reduced economic growth due to contracting participation rates and decreasing AD levels but also gain far greater growth rates during upturns.

In 2020, D/E E’s faced a -2% decrease in GWP whereas AE’s faced a more significant decrease of -5% in GWP from Covid-19.

Question 3

What is the impact of ‘Financial Flows’ on Globalisation?
State 1 Advantage and 1 Disadvantage.

Answer 3

Drives efficient economic growth between countries through foreign aid, FDI, investments, etc.

Advantage: Obtain foreign funds and investments for infrastructure, public G&S, etc.
Disadvantage: Speculators cause significant volatility in the forex markets, ‘overshooting’ appreciation/depreciation trends.

Question 4

What is the impact of ‘Trade in G&S’s’ on Globalisation?
State 1 Advantage and 1 Disadvantage.

Answer 4

Global trade advances economies from the specialised G&S of other countries resources & technology

Advantage: Highly driven by manufactured G&S that were not available beforehand, as well as overseas specialised services

Disadvantage: Highly integrated economies dependent on other economies for their G&S are more vulnerable to recessions.

Question 5

How do Governments support ‘Investment and Transnational Corporations’?

State 1 Advantage and 1 Disadvantage.

Answer 5

Governments reduce barriers of entry, including: subsidisation or reducing tax concessions and investing in foreign firm shares.

Advantage: TNC investments increase globalisation rates as they bring foreign investment, new technologies and diverse human skills.

Disadvantage: TNC’s reduce the market share of domestic, smaller companies, shifting profits to low-tax countries and increasing domestic unemployment.

Question 6

Define ‘Investment and Transnational Corporations’.
What does it measure?
(Hint: Define FDI)

Answer 6

Definition: Investments & overseas TNCs integrated into domestic economies to increase capital growth by buying foreign shares.

Measures the flow of money to establish businesses overseas through Foreign Direct Investment (FDI). The purchasing of foreign firm’s shares and controlling interests.

Question 7

List the 5 factors that WEAKEN Global Economic Integration.

Answer 7

1) Domestic Interest Rates

2) Government Fiscal policies

3) Exchange Rates

4) Structural Factors

5) Regional Factors

Question 8

Discuss the impact of ‘Technology, Transport and Communications’.

Answer 8

Increased globalisation from more efficient and cheaper production + distribution of G&S.

Advantage: Faster transport of X/M, increased production capacity.
- Cargo tracking, increased FDI’s/TNC’s, tourism
- Reduced business costs / transport time-lag, high-speed broadband

Disadvantage: Environmental issues, where developed countries will continue to industrialise in contrast to developing countries that struggle to buy innovative tech.

Question 9

What is the impact of ‘International Division of Labour and Migration’ on Globalisation?

State 1 Advantage and 1 Disadvantage.

Answer 9

Specialised workers are provided rewards based on their education, knowledge and skill-set in suitable economies, generating allocative efficiency.

Advantage: Improves overall productivity of firms and fills in roles that high-skilled employees were not trained to fill, reducing labour costs and increasing economies of scale.

Disadvantage: Creates a ‘brain-drain’ problem from developing economies that lose highly skilled employees to more advanced economies due to better opportunities and higher income.

Question 10

Outline how fluctuating ‘domestic Interest Rates’ weaken global economic integration.

Answer 10

Higher I/R dampens economic activity due to decreased costs of free trade, whereas lower I/R stimulates economic activity due to increasing consumer/business confidence.

With different interest rates fluctuating the E/R, both economies will face separate upturns and downturns, limiting economic growth due to low confidence.

Question 11

Outline how ‘Exchange rates’ weaken global economic integration.

Answer 11

Differs between countries and impacts the level of trade competitiveness and confidence within economies which ultimately affects economic growth.

The Bank of International Settlements (BIS) have observed exchange rates impacting more on developed economies due to a lower prioritisation of government policies affecting business cycles.

Question 12

Outline how ‘Regional factors’ weaken global economic integration.

Answer 12

Regional economies are closely integrated due to location and reduced costs of shipping.
Highly influenced by the economic performance of their neighbouring trading partners, especially from FT agreements, whereas other economies at far distances are less influenced by other economies growth rates.

Question 13

Describe the ‘Brain-Drain’ Effect in the International Labour Market.

Answer 13

Skilled workers migrate to countries that offer greater rewards for their talents, resulting in a shortage of high human capital skills in D&E countries due to the outflow of workers

Question 14

List 3 ‘Structural factors’ that demonstrate an economy’s resilience through global economic integration.

Answer 14

Different levels of economic resilience through different:

1) Levels of innovation and new technologies.
2) Spending/Saving Attitudes due to different exchange and interest rates.
3) Different population growth rates, educating and training employees and regulating business/labour activities.

Question 15

What is a likely outcome of increased economic integration?
a. Higher levels of global inflation due to increased production activity

b. Higher levels of tariff protection to protect local producers from excessive levels of overseas competition

c. Increased financial deregulation in global capital markets

Answer 15

c. Increased financial deregulation in global capital markets.

Since Governments invest less funds for the economy to grow, they have reduced input/control over the economy, whereas global trade supplies economic growth.

Question 16

Distinguish between “investment flows” and “financial flows.

Which one is more susceptible to changes in business cycles?

Answer 16

Investment flows refer to different countries FDI’s and TNC’s, contributing to international growth.
‘Financial flows’ refers to the movement of funds/currencies between different countries.

Investment flows are more affected by regional trades, and forex rates which are vulnerable to speculators whilst financial flows deal with ‘every-day’ equity & debt transactions globally.

Question 17

Distinguish between ‘Absolute Advantage’ and ‘Comparative Advantage’.

Answer 17

Absolute advantage = When one economy produces the highest quantity of goods in the lowest amount of time using the same resource input.

Comparative advantage = The economy that faces the lowest opportunity cost (OC = F/G) for producing the same good as another country.

Question 18

Define ‘Free Trade’ and state the 2 rationales associated with Free Trade.
Hint: 1) GD of R
2) EoS of G&S

Answer 18

Free Trade = Trade left to its natural course without tariffs, quotas, or other restrictions.

1) Global Distribution of resources is UNEVEN.
2) Economies of scale on various G&S requiring different resources, technology and labour/capital.

Question 19

List and briefly explain the 5 advantages of Free Trade.
( Hint: G&S.S.E.C.I )

Answer 19

1) Obtain G&S they can not produce themselves or in insufficient quantities.
2) SPECIALISE in production of G&S they are most efficient at, increasing global comparative advantages.
3) EFFICIENT allocation of resources and labour, leading to economies of scale.
4) International COMPETITIVENESS will improve as domestic businesses face greater competitive pressures from foreign producers.
5) INNOVATION and technology rates improve, leading to more efficient production processes.

Question 20

List and briefly explain the 5 disadvantages of Free Trade.
( Hint: U.NF.D.E.D)

Answer 20

1) Short-term UNEMPLOYMENT increases as domestic firms face difficultly when competing against large, foreign firms.
2) Establishing NEW FIRMS will be difficult for less-advanced economies if industries are not protected.
3) Production surpluses from some countries may be ‘DUMPED’, hurting domestic industries .
4) ENVIRONMENTALLY irresponsible production methods are uncatered for due to lower costs.
5) Some countries may not be able to DIVERSIFY their economic base due to specialisation in specific G&S.

Question 21

Distinguish between Bilateral Trade Agreements and Multilateral Trade Agreements.

List 2 examples of both which Australia is a part of.

Answer 21

Bilateral: Agreement involving two countries, but may reflect slower economic growth due to exclusion of other countries.
(E.g.: chAFTA & JAEPA)

Multilateral: Agreement involving more than two countries, but not necessarily in the same geographic region.
(E.g.: APEC & AANZFTA)

Question 23

List 2 Advantages of Multilateral Agreements and Bilateral Agreements.

Answer 23

Multilateral:
+ Covers many nations in one agreement, creating an even playing field between global economies and other multi FT Agreements.
+ Makes developing countries more competitive, strengthening X/M and globalisation rates.

Bilateral:
+ Greater market access for exporters and potential growth in trade & investment flows. Even cheaper and more diverse G&S is being traded.
+ Easier to establish than multilateral agreements

Question 23

Distinguish between a trading bloc and monetary union, and provide an example of each

Answer 23

Trading bloc = When a number of countries join together in a formal preferential trading agreement, whereas. (E.g.: APEC)

Monetary union = When 2+ countries share the same currency and fixed mutual exchange rates, which are monitored by 1 central bank. (E.g.: EU)

Question 24

List 2 Disadvantages of Multilateral Agreements and Bilateral Agreements.

Answer 24

Multilateral: - Multiple nations must agree to set conditions, limiting the effectiveness of FTAs. - Some nations tend to prioritise national interests over regional FT interests. Bilateral: - Excludes other economies from specialised G&S. Distors trade as commodity prices and U/E rise. - Diverts trade from efficient to less efficient countries, triggering retaliatory effects of other bilateral agreements competing.

Question 25

Outline the 3 responsibilities of WTO. (164 members) Also state it's impact on globalisation.

Answer 25

1) Monitoring and enforcing global trade agreements. 2) Reviewing protection barriers to world trade. 3) Resolve trade disputes between economies. Impact: From Healthy FT relations, WTO have assisted in the increase of trade agreements from 23 in 1990 to 500 in 2022, resulting in lower prices for consumers, greater globalisation rates and limited retaliatory effects.

Question 26

Outline the role and function of the G20 Government forum. What % of GWP do they cover?

Answer 26

Role: G20 (G7 + G12 + EU) coordinates and supervises global, fiscal policies, financial systems and institutions. Accounts for around 80% of total GWP. Function: Resolves current economic and global complications + Lifts trade restrictions during global downturns + Assists member countries that are facing economic hardships.

Question 27

Outline the role/responsibilities of United Nations. (193 members) Also state it's impact on globalisation with an example.

Answer 27

1) To preserve international peace & security. 2) Allow all countries to have equal participation in international affairs + safeguarded rights & interests. Impact: Established a set of global wellbeing goals that advocates for greater globalisation rates and reduced social + economic inequality. E.g.: Allowed multiple developing/emerging economies to have more rights in international organizations.

Question 28

Outline the role/responsibilities of OECD. (38 members) Also state it's impact on globalisation.

Answer 28

1) Assists economic growth, employment rates and higher living standards by promoting economic and social policies. 2) Promotes sustainable economic development by coordinating economic cooperation. Impact: Brings nations together as they assist in understanding the major implication of globalisation through OECD reports on international economies.

Question 29

Outline the differences between IMF vs World Bank.

Answer 29

IMF focus their assistance on: 1) Solving International downturns that may affect other economies or are facing forex currency difficulties. 2) Promoting international monetary stability by overseeing excessive inflation/ER changes. World Bank priorities funds for: 1) Developing economies such as funding infrastructure shortages/capital growth. 2) Aims to reduce extreme world poverty within developing countries.

Question 31

List the 4 reasons why Protectionist Policies are put into place for Free-Trade Agreements. State 1 example for each.

Answer 31

1) Infant Industry Protection - Manufacturing Car Industry (MCI) in Elizabeth being funded $4billion. 2) Domestic Employment - Unemployment increased by 4x in Elizabeth after MCI closed. 3) Dumping - China produces and sells steel at much cheaper prices than the U.S due to government subsidisation. 4) Reliance on Defence - USA produces ALL of their weapons to reduce reliance on other countries.

Question 32

Briefly explain the 3 reasons for why 'infant industries must be protected. Hence, state 2 disadvantages of protecting infant industries.

Answer 32

1) Build capacity – Gain sufficient resources and market share to compete against foreign firms D&I. 2) Establish markets – Gain a strong position in market share to compete internationally with G&S and labour. 3) Achieve economies of scale with the specialised production of G&S, and sustain domestic employment. - Although, firms may become too reliant on these subsidisations and lack incentive to innovate, leading to lower competition rates and diseconomies of scale. - Shifts resources from most efficient industries to less efficient industries.

Question 33

State 1 advantage and disadvantage for protecting Domestic Employment within countries.

Answer 33

+ D&S for local labour + goods will be greater - Increased domestic living standards. - Funds & productivity shift from Efficient export industries to less-efficient industries, reducing economies of scale and innovation of X firms.

Question 34

State how 'Dumping' occurs in less-developed countries and the process for which it happens. List 1 advantage and 1 disadvantage as a result.

Answer 34

When foreign firms attempt to sell their goods in another country’s market at unrealistically low prices. Used to dispose of large production surpluses or to establish a market position in another country. - Harms domestic producers, employment, and innovation once the local competition is gone. + Lower prices for domestic consumers in the short term, but does not last as foreign producers put up their prices.

Question 35

Explain the importance of Defence and why it must be domestically funded/supported.

Answer 35

Major powers want to retain their own defence industry for making their weapons as their demand can not always meet at lower costs due to greater military independence. – To maintain confidence during times of war and to provide defence equipment.

Question 36

Distinguish between Tariffs and Quotas. (Price/Quantity comes first for?) Briefly explain how to calculate each trade barrier graphically and mathematically. (Government Revenue, New Import quantity, Price line)

Answer 36

Tariffs (Price 1st) are taxes placed on foreign goods that are imported into domestic economies, whereas Quotas (Quantity 1st) are quantity limits on the no. of imported, foreign goods. Tariff --> Place a new price line above WP but below equilibrium. Government revenue is calculated from the ΔPrice x New ΔQuantity Quota --> Shift the new quantity values to the desired ΔQuantity, then draw a new price line where it meets DS. Old ΔQuantity - New ΔQuantity

Question 37

Distinguish between Local content rules and Export incentives and Subsidies. For subsidies, also state how to calculate GR and the size of the subsidy change.

Answer 37

Local Content Rules: Domestic-made requirement that a good made in that country must include a certain % of local materials to avoid tax. Export Incentives: Provides domestic producers financial assistance such as grants, loans, etc. to export at a cheaper cost to other countries. Subsidies: Cash payments made by Governments to local producers to increase domestic supply. --> GE = New Quantity x ΔPrice. --> Size of Subsidy = Vertical distance from old DS to new DS.

Question 38

List the Effects of Protection Methods on the Domestic Economy. Production.Employment.GDP.R/E.Government Expenses --> State whether it ↑ or ↓

Answer 38

↑ Production and Supply of Protected Industries ↑ Employment in Protected Industries ↑ GDP (↓ for Export Incentives) ↓ Resources and employment in export industries ↑ Government Expenses (↓ for Tariffs)

Question 39

List the Effects of Protection Methods on the Global Economy. (Hint: G.S.D.R)

Answer 39

↓ in Global GROWTH. - Individual economies can't SPECIALISE. - Difficult for DEVELOPING economies to access advanced economies, especially high-cost FT Agreements. - Possible RETALIATION effects (Export country) --> Further global protection.

Question 40

Distinguish between Economic Growth and Economic Development. (Include Definition, Description and how to measure it).

Answer 40

Economic Growth = The sustained increase in a country's production capacity over time through the value of its outputs. - Measured through AD (GDP) and GNI per capita. Economic Development = Broad measure of welfare in a country that measures wellbeing improvements, rather than money. - Measured through HDI, structural changes and real incomes.

Question 41

Describe the global disparities in wealth and income, using specific examples and statistics.

Answer 41

With advanced economies earning over 2/3 of the world's income, D/E E's do not have the necessary funding in the first place for equal wealth distribution. Additionally, most income is concentrated in these economies due to the brain-drain effect. There is a greater disparity between world wealth than income since the top 1% richest own over 45% of global wealth, while the bottom 50% earn merely 2%.

Question 42

List the 3 key indicators of the Human Development Index (HDI). Briefly explain the criticisms it has for not being the perfect 'quality of life' indicator.

Answer 42

HDI = 1) Life Expectancy (Maternity rates, birth rates) 2) Education Level (Mean & Expected years of schooling) 3) Material Standards of living (GNI per capita) Criticisms: Does not properly reflect inequalities of gender roles, income & wealth, or crime rates.

Question 43

List the 4 global reasons for global growth inequality/differences. (T.F.A.T)

Answer 43

1) Global TRADE System. 2) Global FINANCIAL Architecture. 3) Global AID and Assistance. 4) Global TECHNOLOGY Flows.

Question 44

Briefly outline 'Global Trade System' and 'Global Financial Architecture', explaining their impact on inequality between economies.

Answer 44

1) Global TRADE System: Wealthy Countries protect infant industries to improve the specialisation of domestic goods and to reduce competition. - High difficulty for developing countries to establish FT agreements with A economies due to high costs and complexity of WTO procedures. (Failed Doha Round). 2) Global FINANCIAL Architecture: Despite FF's and FDI's favouring Emerging E's (Holds over 1/2 of FDI flows), they are exposed to economic volatility. - Many developing E's have large foreign debt burdens, increasing the I/W gap.

Question 45

Briefly outline 'Global Aid and Assistance' and 'Global Technology Flows', explaining their impact on inequality between economies.

Answer 45

1) Global AID and Assistance: Around 20% of WB funds are not being fairly distributed and used to improve developing countries. - High-Income economies target their funds towards infrastructure & military, rather than reducing income equality. 2) Global Technology Flows: Greater 'Digital Divide' between economies from reduced access to new technology, infrastructure and education. - Innovative technology is more suited towards high-income countries due to improved forms of demand and supply of R&D and division of labour.

Question 46

List the 7 DOMESTIC Factors that lead to increased inequality between nations. (4 = "Economic Resources" - ER-L.L.C.E) (3 = "Institutional Factors" - I.P.G)

Answer 46

ER: 1) LAND and Natural Resources 2) LABOUR Supply and Quantity 3) CAPITAL and Indebtedness 4) ENTREPRENEURIAL Culture IF: 1) Political and Economic INSTITUTIONS 2) Economic POLICIES 3) GOVERNMENT Responses to Globalisation

Question 47

Briefly outline 2 Domestic Economic Factors that increase economic inequality between nations. (1) Natural Resources (Land) (2) Labour Supply and Quality (Labour)

Answer 47

1) Land and Natural Resources = Greater supply of natural, valued resources. - Leads to a narrow export base. - Leads to over-reliance, making developing economies more susceptible to downturns. 2) Labour Supply and Quality = Highly-Developed economies tend to have highly educated and skilled labour, while low-income economies face high population growth and low education/health levels. E.g.: Singapore committed more funds to education, whereas South Africa is hindered by HIV/AIDS.

Question 48

Briefly outline 2 Domestic Economic Factors that increase development inequality between nations - (Fac.o.Pro) (3) Capital and Indebtedness (Capital) (4) Entrepreneurial Culture (Entreprenuership)

Answer 48

3) Capital and Indebtedness = Decreased access to capital funds and investments force economies to face low growth rates, and lower living standards. - Reduced access to loans leads to reduced spending in the economy. 4) Entrepreneurial culture = Improved economic development and innovation for Advanced Economies that have high scientific R&D. - Corruption levels decrease innovation rates, leading to increased income and wealth inequality.

Question 49

Explain in-detail the 2 global events that occurred in the past and even now, that has hindered the globalisation process. 1) Covid-19 2) US vs China Trade War

Answer 49

1) COVID-19 = Closure of borders reduced immigration/exchange student rates. - Countries ran short of medical supplies due to relying on global supply chains, with China holding roughly 50% of global medical supplies. 2) US vs China Trade War = Trump increased U.S tariff prices against China’s steel and cars. China retaliated by increasing tariffs on Whiskey and Vehicles. - Decreased Globalisation rates from increased costs and reduced profits from diseconomies of scale.