Topic 1: The Global Economy

Question 1

What is the global economy

Answer 1

The interlinked economies of individual countries of the world considered as one large economy

Question 2

How is Gross World Product calculated?

Answer 2

1. The sum of every GDP in the world converted to a common currency
2. Each GDP adjusted for each country’s economic condition converted to a common currency and summed (purchasing power parity (PPP))

Question 3

Where is globalisation at?

Answer 3

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.

Question 4

What has trade in goods and services been doing?

Answer 4

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

Question 5

Financial Flows - FDIs

Answer 5

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

Question 6

Financial Flows - Portfolio Investment

Answer 6

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.

Question 7

What are financial flows doing?

Answer 7

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.

Question 8

How can financial flows be measured

Answer 8

Through foreign exchange markets and derivatives

Question 9

What are some advantages of financial flows?

Answer 9

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

Question 10

What are some disadvantages of financial flows?

Answer 10

Creates volatility in financial markets which can lead to financial crises

Question 11

What has Investment and Transnational Corporations (TNCs) been doing?

Answer 11

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)

Question 12

Technology, Transport and Communications since Globalisation

Answer 12

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

Question 13

International division of labour, migration

Answer 13

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.

Question 14

What are barriers to division of labour?

Answer 14

Immigration restrictions
Incompatible educational and professional qualifications
Language and cultural barriers
Desire to remain near family and friends

Question 15

What are the international and regional business cycles?

Answer 15

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

Question 16

What is happening at the moment in the international business cycle at the moment?

Answer 16

It is currently slowing due to uncertainties about the US and Brexit and the US-China trade war - it slowed 3% in 2018

Question 17

Factors that increase the impact of the international business cycle on a given economy

Answer 17

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)

Question 18

Factors that decrease the impact of the international business cycle on a given economy

Answer 18

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)

Question 19

What is free trade and what is the basic argument?

Answer 19

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.

Question 20

Explain absolute and comparative advantages

Answer 20

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)

Question 21

What are the advantages of free trade?

Answer 21

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)

Question 22

What are the disadvantages of free trade?

Answer 22

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

Question 23

What is the World Trade Organisation (WTO) and what have they done?

Answer 23

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

Question 24

What are some criticisms of the WTO

Answer 24

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

Question 25

What is the International Monetary Fund (IMF) and what have they done?

Answer 25

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

Question 26

What are some criticisms of the IMF?

Answer 26

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

Question 27

What is the World Bank and what have they done?

Answer 27

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

Question 28

What are some criticisms of the World Bank?

Answer 28

Reduced importance
Seen as an instrument of power for Europe and the US
Unequal representation of poorer countries

Question 29

What is the Organisation for Economic Co-operation and Development (OECD)?

Answer 29

Forum of mostly developed countries committed to democracy and market economy. Effectively a think tank for international economic issues and questions.

Question 30

What is the United Nations?

Answer 30

Facilitate cooperation in international law, international security, economic development, social progress, human rights and achievement of world peace.

Question 31

Describe the G8/ G7

Answer 31

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

Question 32

Describe the G20

Answer 32

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