the global economy notes daniel sokol
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Notes for HSC economicsTRANSCRIPT
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The Global Economy
International Economic Integration
The Global Economy and Economic Integration
• Over time, the liberalisation of trade + globalisation has allowed for greater economic integration
- Examples of economic integration are the EU, NAFTA, APEC, AFTA - Allows for greater amount of intra-‐regional trade and intra-‐industry trade
o Ultimately results in increased investment flows and standard of living
The Global Economy
• The IMF publishes the World Economic Outlook -‐ classifying countries into two groups:
1. Advanced Economies -‐ high levels of economic development with average incomes over $30,000 US/annum. Generally are market based with free enterprise systems of resource allocation and limited government intervention
2. Emerging/Developing Economies -‐ India, China, Brazil and transition economies (formerly Communist) in Eastern Europe. These are in the process of raising rates of eco growth/development but have lower per capita incomes and living standards than advanced economies.
• The advanced economies dominate world GDP and trade → 52% of world GDP and 64% of world exports in 2010 → BUT → only represent 15% of total world population!
• Currently, the major emerging economies of Brazil, Russia, India and China have sustained rates of high eco growth and account for 25% of world GDP
• The developing countries are located in Asia, Middle East and North Africa → members of the Organisation of Petroleum Exporting Countries (OPEC) with significant oil exports to the world. → in 2010, accounted for 48% of world GDP, 36% of world trade and 85% of world population
Gross World Product
• World GDP at purchasing power parities (PPP) is the total market value of G/S produced in the world over time → adjusted for inflation + exchange rates
• World output was US $74,275b in 2010 • Advanced economies (34) accounted for 52% of world GDP whilst emerging
economies (150) accounted for 48% of world GDP in 2010 → small number of adv economies dominate the global production of G/S compared to the 150 other eco's.
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• HOWEVER -‐ in terms of growth of national GDPs, emerging and developing eco's have been able to sustain higher rates of growth than adv eco's and their share of world GDP has increased over time
- In 2010, China and India contributed 13.6% and 5.4% of world GDP → exceeded world GDP of Euro Area (14.6%) and almost exceeded the US (19.7%)
- Adv eco's face challenges in sustaining future rates of GDP o Financial restructuring post-‐GFC o Ageing population -‐ limits productivity + increasing stress on govt
funds
Globalisation and Economic Integration
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• Globalisation -‐ refers to the increasing level of economic integration between countries, leading to the emergence of a global market place/global economy
• Economic integration -‐ occurs when trade barriers are reduced or removed between countries to facilitate the growth in free international trade and flows of investment
- This occurs through FTA's, standardisation/customisation of G/S on a global basis and technological change conducting electronic commerce (e-‐commerce)
- Created a world financial system → leading to increased innovation -‐ the IT revolution
- International trade is increasingly linked with FDI → firms gain access to foreign markets.
o 1992 -‐ 1999 -‐ world trade volumes grew at 6.6% per annum whilst FDI grew by 23% per annum. Intra-‐firm trade now makes up 25% of world trade
• Globalisation is highly supported by adv eco's through trade liberalisation policies and microeconomic reforms in commodity, financial and labour markets to increase competitiveness
• Emerging/developing eco's have also embraced policies to liberalise their trade and promote internal eco reforms to capture the gains from international integration
• HOWEVER -‐ led to greater interdependence between nations and the rapid transmission of 'financial contagion' → evident through GFC 2008-‐09
- Negative effect on the distribution of income and wealth
World Trade, Financial Flows and Foreign Investment
• Globalisation has generally led to higher growth in world output and higher growth in world trade → this trend was halted by GFC in 2009 due to increased risk of lenders, higher cost of credit and increased volatility in asset prices + exchange rates
- Global output contacted by -‐0.5% - Exports overall contracted by -‐20%
During downswings such as GFC, global trade has contracted faster than world economic output (GDP) → highlighting the greater volatility of trade compared with GDP.
• Developments in foreign exchange markets have mirrored the rapid growth in the turnover of financial markets, with the holdings of financial assets growing faster than economies in general
• $A was 5th most traded currency in 2010
Globalisation and Foreign Investment
Total FDI in 2008 is 6 times its level since 1995 The general growth in Foreign investment has been due to the easing
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of capital controls between countries due to financial deregulation TNC's and Foreign Investment
TNC's/MNC's are responsible for much of the world's FDI since they set-‐up subsidiaries in other countries to gain access to global markets
TNC's are large and have influenced the pace and spread of globalisation
Wal Mart Stores were the largest MNC by revenue in 2011 -‐ $US422b China has got many state owned MNC's (61) ranked 3rd in the world In competing for FDI, many govt's offer incentives to TNC's such as tax
allowances, govt assistance, infrastructure and less environmental regulations → can cause an imbalance in the countries bop
- They benefit the country through the transfer of technology, employment, tax revenue and exports
Global Production Webs
Globalisation has resulted in the emergence of strategic global production networks established by TNC's → where the production line takes place in different countries
Manufacturing plants tend to be located in places with low labour costs and favourable govt policies → China, India, South Korea, Hong Kong
Developments in technology, transport and communications have enabled TNCs to utilise global supply chains where they source the cheapest inputs of production
THEREFORE -‐ expansion of transport networks has become a major feature of global distribution
Technology, Transport, Communications and Labour
Technology A major change to the global economy and globalisation has been the IT revolution → greater productivity of labour and capital in production and has reduced costs of international business → economies of scale
Led to structural change to G/S distribution methods → electronic commerce
Technology diffusion -‐ when innovation leads to high exports of new IT products
Transport Roads, railways, ports, airports are vital for business operations Transport networks vary between economies
Communications IT has led to growth in telecommunications → mobile phones/internet
International Division of Labour and Migration
Refers to the specialisation of people according to labour tasks in production → closely linked with TNC's which compete for lower labour costs → de-‐industrialisation and job displacement in adv economies as industries locate offshore
Outsourcing of telecommunications to Philippines is an example High skilled labour in IT and Medicine are in demand in adv eco's
The International and Regional Business Cycles
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• Average world growth in output was 3.9% between 1997 -‐ 2008 (prior GFC) • Average world growth during global resources boom 2004-‐08 was 5%
- Larger economies (China, Russia, India, Brazil) grew around 7.5% during that time • GFC led to a fall in output → contraction in world GDP of -‐0.5% • Since national economies are increasingly linked through the process of
globalisation, changes in the international business cycle will impact directly on domestic business cycles - Changes in US business cycle usually affect the rest of the world
• NOTE: - Peak = supply or capacity constraints where inflation begins to rise and growth in
output is no longer available → 2006-‐07 → global growth peaked at 5.2% - Recession = minimum level of global output → GFC →-‐0.5% contraction in
growth
Impact on Economies
Changes in the IBS has varying effects based on a countries level of internationalisation + integration of an economy
If world growth > domestic growth, → ↑ current account surplus (X>M) → KNOW THIS
higher growth → ↑ X rate External Shocks on Economies
Real Shocks -‐ refers to changes in world output, commodity prices or technological change → cause structural changes to occur in an economy
- E.g. (-‐VE) → oil crisis 1970s → caused inflation & slowdowns in growth → stagflation
- E.g. (+VE) → global resources boom 2004-‐07 → lifted world growth over 5%
Financial/Monetary Shocks -‐ transmitted faster than real shocks through changes in asset prices (interest rates/share prices)
- E.g. (-‐VE) → collapse in the sub-‐prime mortgage market US causing GFC
Global Resources Boom 2004-‐07
• In this period, growth of 5% was above the trend of 3.7% between 1972-‐2004 - Rapid expansion was based across China, Europe + Japan
• The effects of growth led to; 1. Stronger demand for resources 2. Higher rates of capacity utilisation led to increased investment in new plants
+ equipment 3. Rates of unemployment fell
• Australia -‐ as a commodity exporter → benefited greatly → X grew by 2.6% → 46.5% of all X were commodity.
GFC 2007-‐09
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• International financial markets experienced volatility due to the collapse in the sub-‐prime mortgage market in US in 07 - Led to bankruptcies reflecting a decline in credit worthiness of borrowers and
lending standards • Transmitted to international financial markets → asset prices for shares, bonds and
other securities fell + increase in IR to reflect the cost of borrowing • Sentiment in global financial markets deteriorated in 08, as banks tightened funding
to leveraged investors → triggering the sale of assets - Worsened with the collapse of Lehman Brothers merchant bank
• GDP grew by just 1.1% in 08 • The increasing extent of financial and trade integration between adv and emerging
eco's facilitated the spread of the GFC • Since GFC → the responses of govt include;
1. Governments extended guarantees for bank deposits 2. Central banks cut official interest rates 3. Fiscal stimulus packages to boost growth and support employment
Changes in World Trade, Financial Flows and Foreign Investment
• As global integration proceeds, developing eco's are more likely to expand their share of the global economy → China, India, Brazil, Russia
• Major trends to emerge in world trade + finance throughout 1990s-‐2000s include; 1. Globalisation of world trade → led to a global market place → dominance of
TNCS 2. Growth of intra-‐regional trade (EU, NAFTA,APEC etc) saw FDI 3. Growth of Asia-‐Pacific region and China 4. Growth of trade in elaborately transformed manufactures (ETMs)
• Main reasons for increasing world economic and trade integration include; 1. Financial deregulation and floating exchange rates → increased the mobility
of capital 2. Reduction in trade barriers has increased trade flows 3. Increased specialisation in ETMs and services 4. Collapse of communism in former Soviet Union and eastern European
countries → increased the demand for capital 5. Rise of regional economic integration → through trade agreements →
increased intra-‐regional trade flows
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Globalisation and Economic Development
The Differences Between Economic Growth and Economic Development
• Purchasing Power Parity (PPP) -‐ theory that states that exchange rates should adjust to equalise the price of identical G/S in different economies throughout the world
• Economic Growth -‐ refers to the increases in real GDP over time (quantitative)→ rising national output, incomes, employment and living standards → comes from;
1. Increased use of resources → land, labour, capital and enterprise 2. Increased productivity of existing resource use → rising labour and capital
productivity Capital Widening -‐ occurs when capital keeps pace with growth in
labour force Capital Deepening -‐ occurs when capital grows faster than labour
force
Economic growth leads to an outward shift in PPF
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• Economic development is a broader concept than EG that attempts to measure improvements in well-‐being or welfare, rather than simply how much extra money people have → quality of life indicators → Qualitative
• Economic development refers to the process of structural change needed for eco-‐growth to occur → ED is a qualitative process involving the development of an economy's economic and social infrastructure. - Changing from a rural based agricultural society to an industrial and service
urban based society - Composition of the workforce also changes → specialisation of production and
higher output with greater technology - E.g. construction of roads, railways, schools, hospitals, bridges, airports are
examples of ED - Process of ED is shown by the link between savings, investment and resource use
leading to EG • ED involves the use of more resources/better quality to improve the distribution of
income and deliver increases in living standards through a 'trickle down effect' where benefits of EG spread throughout the whole population
• Greater participation by a country in globalisation can lead to increased foreign investment and transfers of technology and management skills, which can assist the process of economic development
The Global Distribution of Income and Wealth
• Despite the economic benefits of globalisation, the rewards are not shared equally between advanced, emerging and developing countries
• Despite poverty levels falling (US$1.25/day) →(from 1.9b 1981 -‐ 1.4b 2005) there are still regional differences
- Greatest reduction in poverty occurred in East Asia where it declined from 78% 1981 to 17% in 2005 → fell by more than 750m (mostly in China)
- World Bank estimated that 90m more in poverty due to GFC in developing countries
• Distribution of world income is measured by Gross National Income (GNI) per capita i.e. income per head of population → World Bank classifies countries into;
1. Low income countries (>$) -‐ Africa (mainly) → Niger 2. Lower middle income countries ($996 -‐ $3945) → Eastern Europe → Ukraine
+ Middle East (Iraq) 3. Upper middle income countries ($3946-‐$12,195) → South America
(Mexico/Brazil) 4. High income (<$12916) US, AUS, NZ
• The global distribution of wealth refers to a comparison of the ownership of net assets between countries and regions of the world
- Measures net assets rather than average national income
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- Global distribution of wealth in more uneven than the distribution of income → North America and Europe account for 64% of global wealth
Income and Quality of Life Indicators
• Standard of living in different countries is measured and compared in terms of GNI and a range of other material and non-‐material indicators (literacy, nutrition, health services) which measure the quality of life
• GNI per capita is a basic indicator of ED of a country since it measures the standard of living in that country
• Demographic indicators include particular population or human capital feature of development
- Medium and low development nations account for 70% of global population but account for 25% of world GDP
- High development economies account for 30% of global population and produce 75% of world GDP
• The extent of urbanisation in high eco's (76.6% in 2010) whilst it ranged from 33-‐40% in lower eco's→ reflecting higher concentrations of populations in rural areas, where agriculture is carried out
• Australia was ranked 2nd in HDI 2010
Developing, Emerging and Advanced Economies
• A major change in the global economy has been the importance of developing and emerging economies (150 in total) in their contribution to world output/trade
• Major emerging eco's of Brazil, Russia, India and China (BRICs)have been dominant in sustaining higher rates of growth than the adv eco's
1. Developing Economies -‐ Congo/Niger → economic integration has not really occurred in many developing countries → lack of resources/governance and higher trade barriers
2. Emerging Economies -‐ BRICS → increased their contribution to world output/trade and are undergoing rapid economic development
3. Advanced Economies -‐ US, Aus, Canada → account for 52.3% of world GDP -‐ 34 advanced eco's exist today.
Reasons for Differences in Economic Development between Nations
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• Contrast in the level of economic development between countries is referred to as the 'Development Gap' → since they are distinguished by lower incomes, lower savings, investment and economic growth
- Emerging countries (BRICS) are quickly closing this gap by sustaining higher eco growth etc.
• Development gap leads to significant contrasts in living standards between economies
- Since lower eco's are in southern hemisphere and most adv are in northern → the income gap is referred to as the 'North-‐South Divide'
• Reasons for these differences include; 1. Low per capita incomes reduce the ability to save and invest →difficult to
achieve high productivity 2. Lack of infrastructure and capital formation → prevents efficient use of
labour and capital 3. Low levels of technological progress and labour productivity → lower EG 4. High population growth rates leads to high dependency ratios and increases
demand for education, health, employment etc → population outstrips EG → living standards fall and this can impact on ED
5. Institutional problems from corrupt and inefficient governments → leads to political instability, civil wars and disorder → undermines flow of FDI to support ED
The Effects of Globalisation on Economic Development
• Globalisation (economic integration) has resulted from reduced trade barriers and greater financial market liberalisation → led to growth in world GDP, trade and financial flows and FDI
• Globalising economies (BRICS) grew on average 5% in 1990s compared to the non-‐globalising countries growing at 1.4%
- Led to a large reduction in world poverty and an improvement in HDI → closing the income gap
• Other effects of globalisation include; 1. International convergence -‐ of economic systems as more countries adopt
market capitalism and democracy 2. Risk of financial contagion -‐ as financial crises can be transmitted quickly →
GFC • Despite the positive impacts of globalisation on some countries, it has tended overall
to reinforce the existing income disparities between advanced, emerging and developing countries
- Since 1990, 20 countries has suffered a reversal in their HDI according to the World Bank
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- Setbacks occurred mainly in Sub Saharan Africa → where countries hardly experience EG or ED
- Reflective of the impact of HIV/AIDS epidemic on life expectancy
Global Trade, Investment and Transnational Corporations
• World trade in G/S grew by 8% between 2003-‐08 → global resources boom • Emerging eco's increased their exports by 9.7% → compared with adv of 5.6% • In 2009, world trade contracted by -‐12% due to GFC • Underpinning much of the trade growth has been the liberalisation of trade regimes
→ has been a shift with ETMs trade (high technology goods), services and intellectual property
- TNCs create a web of global production facilities → leads to intra-‐industry trade → some TNCs sales value exceed the value of developing GDPs
• FDI reached US$2 trillion in 2008 → 16% decline during GFC
Environmental Sustainability
• Environmental problems have worsened as global economic activity increases and overpopulation puts pressure on natural resources
• Developing countries have pursued ED often at the expense of environmental quality → deforestation and desertification as they expand agricultural production
• Increasing rates of industrialisation and urbanisation in the emerging and developing world have also led to higher levels of pollution and greenhouse gases
• Average global temperature is predicted to increase by 3.5 degrees Celsius between 2000 and 2100 if global measures are not taken to reduce greenhouse gas emissions
• Stern Report 2006 -‐ recommended the development of a global carbon trading scheme to reduce global emissions → climate change poses risks for ED with greater risks for people in developing economies who have the least resources to adapt to its impacts