Topic 1 - The Global Economy

Question 1

Define ‘THE GLOBAL ECONOMY’

Answer 1

Where the economies of individual countries are linked to each other, and where changes that occur in a singular economy can have a ripple effect on others.

Question 2

Give an example of how changes that occur in one country can effect other countries?

Answer 2

E.g covid and the war in Ukraine - both of these events resulted in global economic impacts on supply chains, production and prices.

Also, since Australia is a smaller, country that is extremely Integrated with the global economy, it can be effected in more substantial ways

Question 3

Define ‘GLOBALISATION’

Answer 3

Integration, interdependance and interconnectedness between different countries/economies and the increased impact of international influences on life and economic society.

Question 4

From an economic point of view, the major indicators of integration between economies include:
(5)

Answer 4

1. International trade of Goods and Services
2. International Financial Flows
3. International Investment Flows and transnational corporations
4. Technology, transport and communication
5. The movement of workers between countries

Question 5

Why do countries trade?

Answer 5

Countries trade so that they can have access to goods that they may otherwise be unable to produce efficiently.
- If it is cheaper to import than produce
- If the other country has the comparative advantage

Question 6

Countries in the global economy are classified by the IMF in two categories:

Answer 6

Advanced Economies
Emerging/Developing Economies

Question 7

Define Advanced Economies + provide examples

Answer 7

Usually market-based economies characterised by high levels of economic development with average per capita incomes of over $US 58,000

Examples: USA, Japan, Germany, United Kingdom, France, Australia

Question 8

Define developing/emerging Economies + provide examples

Answer 8

Economies that are raising their levels of economic growth but have lower per capita incomes and living standards than advanced economies

Emerging economies are already developing rapidly e.g. India, China

Developing economies are still in need of assistance to grow e.g. Mexico, Brazil

Question 9

Define ‘GROSS WORLD PRODUCT’

Answer 9

GWP is the total value of goods and services produced in the world over a period of time. (GDP for the whole world)

Question 10

How is gross world product measured

Answer 10

This is done by equalising the purchasing power of two currencies by taking into account these cost of living and inflation differences.
- An example of how PPP is measured is using the ‘Big Mac Index’

Question 11

Define ‘THE BIG MAC INDEX’

Answer 11

The premise of the Big Mac PPP survey is the idea that a big mac is the same across the globe (same inputs and distribution) so it should have the same relative cost from country to country.

Question 11

Generally, Gross World Product (GWP) is expected to increase over time, however there are several risks to global growth - these include: (3)

Answer 11

1. Continued policy uncertainty
2. Geopolitical tensions
3. Inward looking protection policies (focus on import substitution and protecting domestic industries)

Question 11

What is the relationship between real GDP and World Trade?
(Relates to globalisation, remember the GDP is global domestic product)

Answer 11

• World trade has a greater volatility compared to GDP
• Economies rely on G&S they cant efficiently produce
• Global trade has expanded due to technological advancements
• Improved transport and communication have reduced costs
• Strong growth in trade reflects interdependence among economies.

Question 12

International trade in G&S is an important indicator of globalisation because it is a measure of how G&S produced in an economy are consumed in other economies around the world.

What are some trends that expose this relationship?

Answer 12

The value of exports of G&S has grown rapidly in recent decades, increasing from US$4.3 trillion (19% of global output) in 1990 to US$30.7 trillion (29% of global output) in 2023

The size of the Gross World Product (GWP) – the aggregate value of all G&S produced worldwide each year in the global economy – is now 9 times its nominal level in 1980.

Question 13

What are some trends in increasing trade?

Answer 13

During economic downturns, the growth of global trade contracted faster than world economic output, highlighting the greater volatility of trade compared with the GWP.

The high volume of global trade reflects the fact that economies do not produce or (produce efficiently)all the items they need and have to import G&S.

Global trade has grown strongly for decades because of new technology (transport/communications) providing services to customers in distant markets.

Governments have encouraged trade by removing barriers and joining international and regional trade groups such as:
- The World Trade Organization (WTO)
- European Union (EU)
- Association of South-East Asian Nations (ASEAN).

Question 14

What is the composition of trade?

Answer 14

The mix of what goods and services are being traded

Question 15

Provide 4 advantages of Globalisation

Answer 15

1. Access to labour: widens labour pool from a domestic market to international.
2. Access to jobs: developing nations can gain access to jobs which are being outsourced by wealthier countries
3. Access to resources: allows nations to gain access to resources they otherwise wouldn’t have.
4. The ability for nations to specialise: Global and regional cooperation allow nations to heavily lean into their economic strengths, knowing they can trade products for other resources.

Question 16

Provide 3 disadvantages of Globalisation

Answer 16

1. Increased competition: Some firms, industries, and citizens may elect governments to pursue protectionist policies designed to buffer domestic firms or workers from foreign competition.
2. Disproportionate Growth: Can introduce disproportionate growth both between and within nations.
   • Within countries, globalisation often has the effect of increasing immigration. Macroeconomically, immigration increases gross domestic product (GDP), which can be an economic boon to the recipient nation.
   • Immigration may, however, reduce GDP per capita in the short run if immigrants’ income is lower than the average income of those already living in the country.
3. Environmental Concerns: linked to various environmental challenges, many of which are serious, including:
   Deforestation and loss of biodiversity, Greenhouse gas emissions, pollution, introduction of potentially invasive species.

Question 17

What are the 6 indicators of globalisation (Acronym)

Answer 17

Acronym = LIFT IT

L = Labour Flow
I = Investment Flow
F = Financial Flow
T = Trade Flow

I = International business cycle
T = Technology Flow

Question 18

How is labour flow an indicator of Globalisation?

Define ‘BRAIN DRAIN

Answer 18

High income economies outsource some work to emerging and developing economies because of lower wages. People can work overseas (require a work visa)

BRAIN DRAIN = where skilled workers go overseas for better employment opportunities

Question 19

What causes labour disparities between countries (related to labour as a signifier of globalisation)

Answer 19

Education
Affects supply, there is also an impact on wages
Level of development
Resources
Population
Type of economy (Advanced, developing)
Developing = focused on manufacturing
Advanced = Focused on services

Question 20

Define ‘FOREIGN DIRECT INVESTMENT’

Answer 20

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%)

• FDI is heavily influenced by economic conditions and economic growth in one country has a huge influence of investment from another country.

Question 21

What do transnational corporations have to do with foreign direct investment

Answer 21

TNC’s play a vital role in global investment flows and account for roughly 80% of global trade.

As TNC’s such as Apple and Tesla establish production facilities in a country, they bring foreign investment, new technologies, skills and knowledge.

Question 22

Firstly Define ‘FINANCIAL FLOW’

Answer 22

Financial Flow: Investor sentiment and speculators affect financial flow. Exchange rate also influence whether speculators boy or sell financial assets in the short term.

GO READ THE SECTION OF FINANCIAL FLOWS AS AN INDICATOR OF GLOBALISATION

Question 23

How is trade flow an indicator of globalisation?

Answer 23

Obvious reasons - go read

Question 24

how is Technology flow an indicator of globalisation?

Answer 24

Developments in freight technology.

Cheaper and more reliable international communication through high-speed broadband allows for the provision of commercial services to customers around the world.

In finance and investment, technology plays a key role in facilitating globalisation through secure, high-speed networks that allow money to move around the world in a fraction of a second.

Advances in transportation, such as longer non-stop flights and high-speed rail networks, allow greater labour mobility between economies and increased accessibility to tourism and travel for consumers.