Topic 1: The Global Economy Flashcards
What is the global economy
The interlinked economies of individual countries of the world considered as one large economy
How is Gross World Product calculated?
- The sum of every GDP in the world converted to a common currency
- Each GDP adjusted for each country’s economic condition converted to a common currency and summed (purchasing power parity (PPP))
Where is globalisation at?
It has been increasing over the past 40 years since the industrial revolution with development in communication, transport and technology.
Global growth has tripled and the standard of living has increased since the end of WW2.
Current slowdown due to protectionism due to political uncertainty (US, Brexit) which affects global and thus Australian growth.
What has trade in goods and services been doing?
Trade has doubled relative to income in the past 40 years.
International exports 12% GWP 1960 to 29% GWP 2017
Global trade growth is twice global economic growth. Exports were 31% of GWP before the GFC and they have been slower since
Financial Flows - FDIs
Foreign Direct Investment (FDI) - Foreign based company set up a subsidiary or purchases more than 10% of shares in a foreign company. Long term investments, supported by the government
Financial Flows - Portfolio Investment
Portfolio investment - Foreign based company buys less than 10% of shares in a foreign country. Short term investments, governments are wearier. It can be unstable for a developing country to rely too heavily on them.
What are financial flows doing?
There has been increased importance of FDIs and TNCs which has meant increased technological transfers for ease of trading and other spillover effects. Since deregulation in the 1970s and 80s, financial flows have grown faster than trading - easier to transfer.
How can financial flows be measured
Through foreign exchange markets and derivatives
What are some advantages of financial flows?
Allows countries to achieve higher levels of investment = more economic growth
Allows investors to receive higher returns and greater diversification of investment than investing domestically
What are some disadvantages of financial flows?
Creates volatility in financial markets which can lead to financial crises
What has Investment and Transnational Corporations (TNCs) been doing?
FDIs have decreased from around $200 billion in 1990 to around $3 billion in 2007 just before the GFC to $1.3 billion in 2018 at the end of the recovery. This decrease shows a partial reversal of globalisation.
FDIs used to favour advanced economies but share in developing countries is increasing - 25% to 43% between 2000 - 2017
TNCs - companies with production facilities all over the world. They have played an important in globalisation (37, 000 to 104, 000 since the 1990s)
Technology, Transport and Communications since Globalisation
Communications - reduction in the real cost of communication means increased trade of services
Transport - reduction in the real cost of transport means increased trade of goods
Technology - better technology makes both of these things possible
International division of labour, migration
The increased movement of people to work in different countries (3% of the population)
High skill migration tends to go to wealthier countries - ‘brain drain’ in developing countries
Remittances sent back to developing countries is generally higher than foreign aid.
What are barriers to division of labour?
Immigration restrictions
Incompatible educational and professional qualifications
Language and cultural barriers
Desire to remain near family and friends
What are the international and regional business cycles?
International - GWP tends to grow cyclically
Regional - geographic regions are more likely to follow the same cycle as they trade a lot with each other, e.g. the European Union
What is happening at the moment in the international business cycle at the moment?
It is currently slowing due to uncertainties about the US and Brexit and the US-China trade war - it slowed 3% in 2018
Factors that increase the impact of the international business cycle on a given economy
Changes in demand for exports (how much people are buying from them)
Changes in investment and financial flows (how much money people are putting into the economy)
Changes in the global interest rate (dictates how much people are buying and spending)
Factors that decrease the impact of the international business cycle on a given economy
Changes in domestic interest rates (a country may try and offset external factors by changing domestic rates)
Changes in the exchange rate (depreciating or appreciating the currency can affect exports)
Changes in domestic economic policy (domestic fiscal and monetary policy may be used to offset external)
What is free trade and what is the basic argument?
Free trade is the removal of trade barriers (protectionism) between countries.
Different countries have different factor endowments (what they can make) and thus should trade
This results in specialisation as countries can benefit from each other’s economies of scale and better allocate resources.
Explain absolute and comparative advantages
Absolute: if fewer resources are required to make something
Comparative: if comparatively another country has a lower opportunity cost
E.g. If Britain can produce 200 units of cloth and 100 units of wine, where Portugal can only produce 25 units of cloth and 50 units of wine, Britain has the absolute advantage in both, however, Portugal has the comparative advantage in wine as they have a lower opportunity cost (1/2 instead of 2)
What are the advantages of free trade?
Increased output from scarce resources (making the most out of rare things - whoever is producing them is the most efficient)
Increased standard of living (more for less)
Forces firms to operate efficiently (or they’ll be replaced by a more efficient firm somewhere else)
Generates lower consumer prices (more efficient)
Increased incentive for improvement and innovation from companies (there are other firms selling cheaper)
Makes going to war costly (high level of interdependence)
What are the disadvantages of free trade?
Short-term increased in structural unemployment as inefficient firms are pressed out (e.g. Au car industry)
Makes it harder for smaller firms to start up as there are lots of bigger more efficient ones
Countries are no longer self-reliant
What is the World Trade Organisation (WTO) and what have they done?
Resolve trade disputes
Recent: Australia recently submitted a complaint to them that India has been dumping sugar (high subsidies)
Doha Round talks - still incomplete due to agricultural protection and intellectual property disputes
Have settled over 500 disputes and issued rulings on over 300 cases
What are some criticisms of the WTO
They’re better at dealing with smaller countries
The US keeps threatening to withdraw and blocking appointments to the adjudication panel
Doha rounds are still incomplete
What is the International Monetary Fund (IMF) and what have they done?
Maintain international stability. Formed at the Bretton-Woods conference in 1944 to help manage the system of fixed rates convertible to gold
Recent:
Lent $250 billion to support the global economy during the GFC
Major role in the European Sovereign Debt Crisis - €110 billion bailout in 2010 to Greece
Granted $57b loan package to Argentina in 2018
What are some criticisms of the IMF?
Conditionality of loans and strict structural adjustment policies (Washington Consensus - strict ‘package’)
IMF advice in the Asian Financial Crisis seen as counterproductive
Supports interest of lenders over borrowers
What is the World Bank and what have they done?
Assist poorer countries with economic development - loans, grants and technical advice. Formed at the Bretton-Woods Conference to help finance post-war Europe. Recent:
$67b loans and grants in 2018
Supports Highly Indebted Poor Countries (HIPC) - has leant $99b debt relief
$120m to reduce youth unemployment in Nepal
What are some criticisms of the World Bank?
Reduced importance
Seen as an instrument of power for Europe and the US
Unequal representation of poorer countries
What is the Organisation for Economic Co-operation and Development (OECD)?
Forum of mostly developed countries committed to democracy and market economy. Effectively a think tank for international economic issues and questions.
What is the United Nations?
Facilitate cooperation in international law, international security, economic development, social progress, human rights and achievement of world peace.
Describe the G8/ G7
Consists of the US, UK, France, Germany, Canada, Japan and Italy. Russia made 8 before they were kicked out for invading Crimea
Meet to discuss global economic and political issues
Seen as not very relevant or inclusive
Describe the G20
Group of finance ministers and central bank governors for 20 of the largest economies (including Australia, China, India and Brazil).
They meet annually to bring important industrialised and developing economies together to discuss key issues in their economies and the global economy
Seen as much more relevant
