Topic 1- The Global Economy Flashcards
What is the global economy
The global economy refers to how the economies of individual countries are linked to each other and changes in a single economy can have ripple effects on others- ECONOMIES ARE SYNCHRONISED
What is Gross World Product(GWP)
Gross World Product(GWP) is the total value of the global economy over a period, usually a year. That is, the sum of all the countries GDP, the amount they produced
What is GWP measured in
GWP can be measured in USD or in PPP(purchasing power parity)
Define Purchasing Power Parity(PPP)
What was the GWP in 2020
83.8 trillions in 2020, which is equal $130.2 in PPP
Define globalisation
Globalisation refers to the increased integration of different countries and economies and the increased impact of international influences on all aspects of life and economic growth
What are the 5 key features and indicators of globalisation
- Trade in goods and services
- financial flows
- investment and transnational corporations
- technology, transport and communication
- international division of labour, migration
What are the general globalisation trends
- Accelerated in the 90s
- volume of global trade has increased by 50x from the 1950s
What is trade in goods and services in terms of globalisation
involves the transfer of goods and services between nations(imports and exports)
What are the trends in trade in goods and service
2000: high income economies- 80.5% and East Asia & Pacific- 8.4%
2019: high income economies- 72.3% and East Asia and Pacific- 19.8%
why is trade in goods and services increasing and in which industries
due to the economic integration, with the removal of trade protection between countries, allowing for cheaper costs to trade and increased values
increasing in transport, travel, insurance and financial services and IT
What is financial flows in relation to globalisation
Financial flows involve the transfer of funds between nations and it is the most globalised feature of the global economy because of the role of information technology and the internet in facilitating transfers very quickly(sometimes instantaneously)
What is the main way to measure financial flows
One way to measure financial flows is the level of exchange trade derivatives which were $95 trillion in 2019 and $79 trillion in 2020, compared to just $14 trillion in 2000
whats a derivative
A derivative is a type of financial instrument used to reduce risk in international transactions, used to offset fluctiation in exchange rates
What are investment and transnational corporations in reference to globalisation
Investment refers to the two types of investment in the KAFA, Foreign direct and Portfolio
Transnational corporations operate in at least two countries and are largely responsible for FDIs as they set up intermediaries in other countries to maximise growth and revenue
whats the benefit of investment and TNC’s as a result of globalisation
leads to investment in technology, infrastructure and local employment to sustain operations
Whats the importance of technology, transport and communication in regards to globalisation
allowed for more efficient and effective communications for business purposes as well as facilitating financial transactions
What is international division of labour, migration in regards to globalisation
the international division of labour refers to the geographical division of labour and workers around the world based on specialised skills. Certain countries are known for low skill, low cost labour(south east Asia like china) whilst other regions like silicon valley are known for highly skilled workers and their innovation. This allows for specialisation in production leading to comparative advantage
how has freight and transportation developed as a result of globalisation
alongside communication improvements, physical transportation has also developed, seen through containerisation. The use of a standard freight container size. Another major development is the rapid technological developments in highspeed aircraft and rail which have reduced travel time
What is brain drain
brain drain refers to the recent trend of highly skilled labour in smaller economies such as Australia migrating to the richest economies such as USA or UK for better pay/work conditions, reducing labour quality in original country.
what is the most limited factor of globalisation and why
the most limited factor is the international division of labour, due to stricter immigration policies, as well as cultural and language barriers, as well as lack of recognition of qualifications
what is the business cycle
the business cycle refers to the fluctuations in the level of economic growth over time. These fluctuations are caused by a variety of domestic and international factors, and due to globalisation, these international factors are increasingly significant
What are the stages of the business cycle
Expansion, recession(two consecutive periods of growth/neg. growth) peak and trough(high and low)
what does the international business cycle track and what is the expectation
the movement of the global economy and GWP over time, and is expected to grow
How has globalisation impacted individual business cycles
due to globalisation, individual economies have become more interconnected, leading to them moving similarly, with the RBA identifying up to 63% of changes to AUS GDP caused by performance of G7 partners
What is a regional business cycle
while globalisation suggests an international business cycle, regional business cycles may be a more accurate measure, as evidence exists to suggest that only economies within a geographical region are integrated, not worldwide
What is free trade
Free trade refers to a situation with no artificial barriers imposed on trade to restrict the free exchange of goods and services between countries to protect domestic producers from foreign competitors
What are the major arguments for free trade
- due to countries having limited factors of production, every country cant produce all products
- allows for specialization by countries, as countries have different levels of efficiency in different industries, so specialisation takes advantage of the comparative advantage to maximise global production
What is the absolute advantage
absolute advantage is a situation where once country, given the same resources, will produce more output than the other in one industry/product. (don’t worry about the production of other products)
What is comparative advantage
Comparative advantage suggests that if each country specialises in the production of the good in which they have the lowest opportunity costs in which they have the lowest cost of producing, allowing both countries to benefit from international trade
If Australia can produce 100 tonnes of cheese or 100 tonnes of grapes, and France can produce 400 tonnes of cheese and 300 tonnes of grapes, what should occur under absolute and comparative advantage
Under absolute advantage, France can produce 200 tonnes of cheese and 150 tonnes of grapes together, so they have absolute advantage in both and should produce both, and Australia should go fuck themselves? Unde
What are the advantages of free trade
- Greater access to goods and services
- Increased specialisation allowing for economies of scale
- More efficient allocation of resources leading to greater GWP(Allocative efficiency)
- Increased spread of technological progress and incentive to firms to innovate(dynamic efficiency)
- Increased international competitiveness due to increased competition leading to lower prices
What are the disadvantages of free trade
- increased short run unemployment as firms move production overseas
- harder for infant industries to grow domestically as international firms take over
- Dumping starts to occur
- can lead to dependence on imports to sustain living standards
- encourages gaining comparative advantage unethically- ecological sustainability
Define Dumping and negatives
- when a country or company exports a product at a price that is lower in the foreign importing market than the price in the exporter’s domestic market.
- One of the biggest disadvantages of trade dumping is that subsidies can become too costly over time to be sustainable.
- also leads to local producers being pushed out due to low prices
Reasons for protection
- protect domestic employment in the short run(however damages eco growth)
-Protect infant industries - prevent dumping protecting domestic firms
- ensures defence is self-sufficient, produced domestically
- protect environment by rejecting trades of products created due to ecological sustainability
What are the 5 methods of protection
tariffs, subsidies, quotas, local content rules, export incentives
Define the tariff
tariffs are taxes placed on imports when they arrive onshore. The tax itself is referred to as customs duty is collected by the government, giving them revenue
What are the 6 effects of a tariff
protective effect, revenue effect, redistribution effect, reallocative effect, retaliation effect, low consumer sovereignty
whats the protective effect
increases the quantity of goods supplied to the market by domestic producers
whats the revenue effect
raises revenue for the government
whats the redistribution effect
income is redistributed from foreign products towards domestic producers, and the government
whats the reallocative effect
increase domestic employment levels, leading to a reallocation of resources towards inefficient industries
whats the retaliation effect
raises risk of foreign trading partners implementing their own retaliiatory tariffs
whats lower consumer sovereignity
increases the prices of goods and services, and reduces variety available
whats a subsidy
subsidies involve financial assistance or cash grants paid to domestic
If given a demand-supply curve, what would a subsidy do
shift the supply curve down by the value of the subsidy
What are the 4 effects of a subsidy
Protective effect, Redistribution effect, reallocative effect, direct cost on government
Whats the direct cost on government of a subsidy
the government needs to pay the subsidy
whats a quota
a quota is the quantitative restriction on import levels, hence making foreign supply perfectly inelastic(price has no effect on quantity, it is simply determined by what the government allows)
what are the 5 effects of a quota
protective effect, redistribution effect, reallocative effect, retaliation effect, low consumer sovereignty
whats local content rules
local content rules are government procurement policies, which state that certain percentages of inputs or outputs must be manufactured in Australia
whats export incentives
includes both export and tax incentives which reduce the cost of production for local producers by allowing tax deductions for exporting domestic firms, supporting them in gaining global market share as they can export goods at a cheaper price than global competitors
What are the effects of protection on the domestic economy
- local industries and firms benefit in the short run as they can increase output and grow market share, however in medium to long run the economy suffers loss due to misallocation of resources into inefficient resources(car go vroom vroom)
- increased prices from artificially supported industries will lead to inflation in product markets
- economic growth slows due to inefficient production
What are the effects of protection on the global economy
- subsidies in one country limit other more efficient economies from accessing the global market- if Aus farmers are subsidised then other countries will struggle to compete
- trade liberalisation benefits all economies, as it allows for more competitive economy- cheaper prices
What is an international organisation
An international organisation are institutions that operate on a global scale, and have significant global influence, including the WTO, the IMF and the World Bank. They are important in solving complex global issues, resolving trade disputes and providing financial aid to developing countries
What is the World Trade Organisation and whats its role
The WTO is an intergovernmental organisation that regulates international trade. It helps reduce barriers for trade and the promotion of free trade. It is the main multilateral trade organisation providing a forum for countries to resolve trade disputes
what are the three main aims of the WTO
- Non discrimination between nation through the “most-favoured nation” which means members need to provide all members with the same privileges
- trade liberalisation through the limitation of protection between member countries
- stability of trade relations where mechanisms are in place to discuss and resolve trade disputes
What is the WTO’s preferred method of protection
The WTO prefers tariffs, due to their visibility to consumers and countries, through the increase in prices
Whats an example of the WTO resolving a trade dispute
Australia were disputing China in 2021, concerned about the dumping of wine
Whats a major limitation of the WTO
they need consensus from all members so EU and US just say no
What role does the IMF play in the global economy
- to provide financial assistance to countries experiencing BOP difficulties through securing financial stability, Known as rescue packages
What are the 5 key aims of the International Monetary Fund
- Global Monetary Cooperation
- Secure financial stability
- facilitate international trade
- promote high employment
- reduce poverty globally
How is the IMF funded
through quota provided by member countries
whats an example of a rescue package
$250 billion during GFC due to the struggles of developing economies to access private capital markets
What are the conditions of IMF rescue packages
- has to implement structural adjustment policies including
- reduce size of governments
- implements contractionary/neutral macroeconomic policy
- privatising government businesses
- deregulating markets
What are the criticisms of the IMF
- economists argue for free market, and they create moral hazard(if we go broke we get money)
What are some successes of the IMF
- Supported Serbia during a significant recession through a 1.32billion dollar loan in 2014
Whats the difference between the IMF and the World Bank
the IMF focuses on keeping economy stable while World Bank focuses on economic development for developing economys
What does the World Bank focus on
the World Bank focuses on providing financial and technical assistance to countries that are underdeveloped to improve economic development
What are the two main goals of the World Bank
- ending extreme poverty(less than 1.9usd per day)- reducing to less than 3%
- facilitating the income growth for the bottom 40% for every member nation
what does the World Bank really do
they make loans to developing countries at rates below the standard commercial rates to fund infrastructure projects
what are the criticisms of the World Bank
- declined in presence coz of private marker lenders
- vulnerable to corruption
What is the role of the UN in promoting globalisation
- developed international standards for trade and investment flows to occur including standards for food safety
What does the Organisation for Economic Cooperation and Development(OECD) do
- conducts research on economy policy issues
- coordinate economic cooperation amongst member nations towards common policy agendas
- during the GFC it played a role in the synchronisation of macroeconomic policy agendas
- promotes both free markets and government intervention
what is the G7/8
The G7 is a meeting of financial ministers from the seven largest economies
who are the 7(8) countries in the G7
- USA, Japan, Germany, UK, France, Italy, Canada, (Russia was the 8th till they got kicked)
Whos in the G20
Consists of the G8+ 12 major advanced, emerging and developing economies- including AUS, US, EU
What is the G20 and what are their mains
the main economic forum of affluent nations, with 3 main aims
- policy coordination between member countries to achieve global economic sustainability
- promotion of financial regulations
- creation of financial architecture
What are free trade agreements
a treaty between 2 or more countries to establish a free trade area where goods and services can be conducted across common borders without protection
Whats an example of a regional agreement
Asia- Pacific Economic Corporation(APEC) has 21 member nations from around the Pacific Rim which aim to promote free trade. Members include Australia, USA, China. Non-discriminatory grouping is used, meaning members will trade the same with non members if they provide equal access
What are the three types of Free Trade Agreement
- Bilateral agreement with two countries
- Regional agreements within a geographical area
- multilateral agreement with three or more countries
Whats an example of a bilateral trade agreement
ChAFTA aimed on eliminating the remaining tariffs on Australian barley, and a rapid tariff reduction in other agricultural exports
- when fully implemented in 2029 virtually all exports will be tariff-free
Whats a trading bloc
trading blocs are formed when a group of countries join in a formal preferential trade agreement to the exclusion of other countries. Have free trade within but common tariffs on non-members eg. EU and NAFTA(North America)
whats NAFTA
benefits farmers
Whats a monetary union
a monetary union is a group of economies that use a common currency and has its own central bank. The most common example is the EU
What are some details on the EU- monetary union
uses a common currency of Euro and the European Central bank. Has 28 members, and has dismantled trade barriers within Europe, however, has increased trade barriers with non-member countries, making it a trading bloc
- BREXIT MEANS BREXIT
What is economic development
a measure of the impact that economic growth has on on the people within the economy. It is a medium to long term process of structural change that involves the development of economic and social infrastructure
difference between economic growth and economic development
Economic growth is just change in GDP over a period of time but doesn’t reflect structural change, while economic development is a broader measure of welfare, including indicators of health, education, enviro quality, material living standards
Whats the indicator of income and define
Gross National Income is the sum of value added by all resident producers in an economy plus receipts of primary income from foreign sources.
whata are the 3 measures of QoL
- consumption profiles consider % of ppl with television and internet, % of population in poverty and govt spending on health
- demographic indicators such as ghiher population growth rates in poorly developed nations and low life expectancy
- HDI by UN which looks at GNI, life expectancy and average years of schooling(0-1 ranking)
D of y in relation to eco dev
better in developed countries
Enviro in relation to eco dev
kuznets curve
