Annie Unsworth - Economics Topic 1.Docx[1]

8/3/2019 Annie Unsworth - Economics Topic 1.Docx[1]

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Topic 1 The Global EconomyFeatures of the global Econo

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Nature of the global economy and globalisationWorld Economy: the sum of all countries in the world engaging in economic activity.

The total amount of goods services and resources exchanged throughout the world.Globalisation: refers to a process of integration of national economies into the globaleconomy through trade, investment and the reduction of artificial barriers to trade andinvestment.The term globalisation covers:

Increase in the trade of goods and services beyond national boundaries

Increase in the movements of capital, labour and technology between nations

Increase in interdependency between economies

Growth in the size and number of TNCs

Need for more intergovernmental consultations and agreements

Increasing environmental damage

Gross World Product

The total market value of all goods and services produced by all countries over

a giver time period Statistics

$US 27.5 trillion (1990) - $US 69.7 Trillion (2009) shows an increase in world economic growth

the advanced industrial economies (29 0f them) accounted fro US$30,393b or 54.6%of GDP in 2004, yet had only 15.3% of the worlds population in 2003

Over half the worlds production occurs in five nations: USA, China, India, Germany, Japan

Aspects of GlobalisationEconomic Integration: occurs when trade barriers are reduced or removed betweencountries to facilitate growth in free international trade and investment flows.

1. Trade2. Investment and Technology3. Finance4. Labour

Trade The growth in global markets is shown by the growth in the trade of goods and

services between nations higher world output

Trade increases $US 8.7 trillion (1990) - $US 29.2 trillion (2007), halted

by the GFC, IMF forecasted negative growth of -1.5% in 2009 Increased intra-firm trade to utilise comparative advantage and economies of

scale High income Countries have 70.1% of the world exports, while middle income

countries have 28.2% and low income have only 1.7%. The reason for this imbalance is that developed countries have seized the

opportunities of economic and technological globalisation, which has increased theirshare of exports

Trade dependency

Measure of growth in global markets the importance of exports and importscompared with the value of the nations production.

38 nations have very high dependency. Trade totals at least 80% of the value of goodsproduced in the economy


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Hong Kong trade dependency of goods of 295% in 2003 (was 128% in 1980) These very high trade dependency economies are scattered around the world

suggesting high level of trade flows throughout the worldInvestment and Technology

1. Foreign Investment

Foreign Direct Investment is where companies establish or buy a controlling interestin a foreign subsidy

$US 330 billion (1995) - $US 1.35 Trillion (2006)

Foreign portfolio investment is where equity and debt securities are acquired Purchasing ownership rights to foreign assts without gaining any significant

control over the use of these assets The growth of FDI and FPI has been due to the easing of capital controls

between countries as the process of financial deregulation has spread globally

Financial deregulation greater role for market forces to allocate financial andinvestment resources

Easing capital controls raised competition in financial markets. More efficient

link of net savers and borrowers and more diversified product lines

2. Technology

Technology has reduced the cost of conducting international business New technologies have increased productivity of labour and capital Structural changes to the way goods and services are produced and distributed

Electronic commerce benefits

1. Instantaneous ordering of stock. Therefore respond to changes in demandquickly

2. Information technology used to maintain inventories more efficiency.Therefore reducing costs3. New products have increased the range of choice. This increases competition

and reduces the price of the good.4. Reduce labour costs in marketing and distributing through the internet and

electronic commerce5. Reduced the rate of wholesalers and middlemen in distribution. Therefore

increases profit.6. Faster rate of innovation in product development

High technology exports account for 20-30% of all manufactured exports from

China.Technology Diffusion: extent to which high technology products are exportedTransnational Corporations: establish subsidiaries in other nations in order to

establish production facilities offshore minimise costs The factor driving development of global webs is minimisation of costs and

economies of scale Manufacturing plants and high technology export products located in

countries with low labour costs and low taxes e.g. China. Once manufactured these components are distributed by TNCs

High technology products are customised to meet the preferences of

consumers in different markets

Finance


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Global Financial Crisis falls in financial activity in world financial markets. Dueto risk aversion of lenders.

Up until 2008, the bulk of trading was in debt securities, bonds and notes.Long term growth in the global derivatives trading e.g. futures, options and swaps;

due to its use as a risk management strategy as derivatives trading is used as part of

standard corporate management techniques.Process of deregulation in Australia:

1. Float of Australian dollar in world market2. More banking licenses to foreign banks3. Relaxation of interest rate requirements on deposits and lending4. Growth of long term and short term debt markets5. Increased access to Australian capital markets from overseas

This increases the competitiveness of the Australian economy with internationaleconomies. It also makes it more easily accessible to overseas institutions. It increasesthe flow of funds entering and exiting the market, which facilitates trade.Globalisation and Labour

Movement of Labour Maimise Opportunity rich make more money, poor better

opportunities: developing nations to developed nations Immigration and emigration

Legally approved change in permanent residency for economic, personal andhumanitarian reasons

Favour peple with high skill levels e.g. IT and medicine Temporary of guest workers

Lower skill workers Illegal entrants

Those who overstay visas withought the approval of government authorities Foreign workers made a substantial contribution to the balance of

payments of their home countries by remitting savings from theirsalaries.

Problems associated with the international migration of workers

Workers from developing countries are exploited Black market of migrant workers to work in illegal industries e.g. prostitution Growing need for developed countries to increases their labour supply due to

an ageing population Flood of illegal refugees from developing nations to developed seeking

employment

Highly skilled workers leaving developed and developing countries to seekemployment and higher incomes in other rich industrial countries.

The International Business CycleMajor phases of the business cycle

1. Expansion- upturn in demand, fall in inventories, increased demand forresources including labour and new investment in plant and equipment e.g.2003-2005 global resources boom

2. Peak supply or capacity constraints, where inflation starts to rise and thegrowth in global output is no longer sustainable e.g. 2006 and 2007 globalgrowth peaked

3. Downswing falling demand ad output and rising rates of unemployment asglobal economic activity slows e.g. 1997-98 Asian Financial Crisis


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4. Trough or Recession fall in global output and demand reach their minimumpoint e.g. IMFs forecast for a world recession in 2009.

Globalisation and economic integration between countries have meant that theeconomic performance of individual countries is closely linked to the international

business cycle

E.g. global resources boom between 2004 and 2007, led to rising demand for rawmarkets and capital from fast growing economies.

This upturn in commodity prices led to rising commodity prices and higher world

growth of 5% between 2005 and 2007.Deteriorate of global outlook in late 2007 due to the collapse of sub-prime mortgagesin the USA, has led to a serious crisis in the global financial system.

This is evident by the rising cost of credit and the falling asset prices.

Slowdown in world economic growth to 3.2% in 2008

Most industrial economies experienced contractions in output, with some advanced

countries forecasting a deep recession.The world economy entering a boom

Decrease in protection and tariffs by countries Increase In Aggregate Demand through an increase in consumption and

investment Increase in the supply of technology Increase in government expenditure and deficit spending Increase confidence for jobs and profit Globalisation Development of FDI and FPI, through the emergence of countries such as

ChinaThe World economy entering a recession

Decrease In foreign investment Increase in tariffs e.g. US tyres

Rise in oil prices cost push inflation Rise in commodity prices, coal and food Lower aggregate demand

Structural Change changes in the nature and composition of production1. Market based changes e.g. technology, demographical changes, change in

tastes and preferences, increase growth through globalisation2. Government induced changes e.g. tax, reduction in tariffs.

Trade and Financial Flows

World Trade and Financial Flows Increased economic integration between countries have increased economic

links between economies, therefore increased world trade As global integration proceeds, developing nations expand their share of the

global economy e.g. China

Globalisation of world trade global market place

Reasons for integration of trade and world economies

Financial deregulation and floating exchange rates Increased mobility of

capital. Trade surplus companies (China) export capital to trade deficit countries (USA)

Decrease in trade barriers through trade agreements increase in trade flows

Trade in ETMs has grown rapidly, due to less protection An increase in specialisation and exchange in ETMs and services


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Collapse of communism increased demand for capital integration

through trade and investment Trade linked with investment as companies used FDI to access foreign markets

Regional economic integration formation of trade agreements

Intra regional trade (NAFTA) trade linked to FDI

Foreign Exchange Market Needed so that Australian dollar funds can be exchanged into currency of

choice Daily turnover increase $US 1. Trillion (2001) - $US 3 Trillion (2007).

Currency becomes an assetParticipants of Foreign Exchange Markets

The normal buyers and sellers who want to exchange some of their own finds

These will be exporters, importers, tourists, firms moving funds dor direct andportfolio investment purposes and governments wither paying or imports orborrowing and repaying loans

Intermediaries

Providing services to their customers Trading in foreign currency Profit motivated Speculators

Anticipate movements in exchange rates to make a profit Non- financial Institutions

Governments, IMF, UNImpact of Changes in trade and financial flows in economies

Trade flows Exports are an injection into the circular flow

Increased X (exports) is a component of Aggregate Demand, raises total sales of firmswhich encourages increased output increased GDP

Increased GDP will require more factors of production to be employed in production.Household income (Y) will rise and encourage more consumption spending (c), moresavings (s) and more taxation revenue being available to the government

Imports are leakages from circular glow

Income and resources are directed out of the economy Positively

Consumers have access to a wider range of goods and services at a lower priceincreased living standards

Put pressure on local firms to become efficient Provide access to better technology

If world growth exceeds a countrys domestic rate of growth, with exports

increasing faster than imports, its balance of payments on current accountshould improve and move into surplus.

Financial Flows Foreign savings add to local savings needed to finance investment

expenditure. Raised investment production of goods and services in thefuture

Change in world financial flows 0> change sin domestic flows

Foreign direct investment

new technology

raises efficiency of the use offactors of production


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However

Australian savings may be attracted abroad leaving a shortage of savings High foreign savings may see panic outflow, such as the 1998 Asian financial crisis

Collapse in the value of their currencies, sharp rise inunemployment, inflation, falling wealth through stock market and real

estate valuesExternal Shocks transmitted to domestic economies.

Real shocks The changes in real variables such as world output, commodity prices or

technological change. This can cause structural changes to occur in the real economy E.g. negative shocks such as the world oil crisis in 1973 and 1979, which led to a

world wide recession E.g. Positive real shocks include the world economy between 2004 and 2007, global

resource boon lifted growth above 5% Financial or monetary shocks

Refer to changes in financial variables such as international share prises, a rise in

international interest rates or inflation rates E.g. the Asian currency crisis in 1997 due to a rapid withdrawal of capital.

Case Study 1 Asian Recession 1997 Due to: a lack of international controls over capital markets, which led to destabilising

speculation and volatility of shirt term capital flows, which led to financial congestion Asian currencies e.g. Indonesian rupiah fell dramatically, die to poor lending policies

of many Asian banks and a lack o prudential supervision Asian Crisis was transmitted around the Asian region, a collapse in one country was

transmitted to its trading partnersCase Study 2 US recession in 2001 and the Iraq War in 2003

A collapse in the price of technology, led to a loss of confidence, whichcaused a slowdown in all major regions September 11 caused a further slowdown in activity, the US federal reserve

cut interest rates to ensure liquidity and to restore consumer confidence Iraq war caused further shocks to the US economy. It meant an increase in the

US budget deficit and political uncertainty.Case Study 3 Higher World Oil prices in 2005-2006

World oil prices increased, reflecting the depreciation of the US dollar The rise in world oil prices can be traced back to global supply and demand

factors, demand for oil increased because of strong economic activity Much of the increased demand is from China, which accounts for 1.4. Million

barrels per day Short term threats to oil supply in 2005/0g included

Iraq war and Saudi Arabia terrorism Financial difficulties for Russias largest oil company

Oil Prices reached over US$140 in 2008Case Study 4 Global Resources boom 2004-07

Higher output growth of 5% p.a. Resources boom resulted in stronger demand fro resources higher rates of

capital utilisation and a fall in unemployment Expansion was based across all regions with rapid growth in China Australia as a commodity exporter benefited greatly from the global resources

boom. The value of resource exports grew, and accounted fro 46.5% of totalexports, this increase in demand was due to development in china


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Case Study 5 US Sub-Prime, Global Credit and Financial Crisis 2007-09 Collapse of sub-prime mortgage market, sub-prime loans by banks provided

those with lower credit rating mortgages (high risk) Collapse caused asset prices for shares and bonds to fall and there was an

increase in interest rates. The US Federal Reserve injected liquidity into cash

markets to restore confidence. Banks withdrew funding to high leveraged investors, which triggered forced

asset sales US fiscal stimulus package of US$146b to support household spending and

business investment In December 2008, the financial crisis led to an unprecedented and

synchronised global contraction in output, trade and capital flows as the USAfinancial markets are linked to the US export market.

In December 2008, the contraction on GDP was -6.35% Transmission of GFC- the GFC transmitted into a recession as it moved from

the financial sector to the real economy, affecting confidence. The GFC has required co-ordinated policy responses and the use of fiscal

stimulus packages to support aggregate demand. The increasing extent of the global financial crisis is due to the increasing

extent of the financial and trade linkages between advanced and emergingeconomies.

Free Trade and Protection

The Basis of free tradeSpecialisation: producing what you sell the best and then trading the surplusFactor Endowment (resource endowment)

The ability to trade due to countries differing in the quantity and quality of resources

available If some goods do not meet the needs of the country, it will have to trade with other

countries who want what it has got and have what it wants Determined by the supply of natural resources, labour, capital and enterprise

Absolute Advantage A situation where a country with a given level of resources can produce more output

than another country with the same level of resources Improves efficiency and productivity Increased economies of scale

Increase in incomes and consumer satisfaction asHigher incomes - higher living standards

Comparative Advantage Even if one country has an absolute advantage in producing all goods over another

country, each country will gain from trade provided each specialises in the productionand export of the good in which it has the lowest opportunity cost.

Opportunity cost = amount of the good forgone over the amount of the good produced

The Advantages of Free Trade economic benefits structural change Benefits of free trade come down to their factor endowments

Intense competition sends price signals to industry

Industry thrives or wilts upon its relative productivity

The Economy specialises in the factors of production according to absoluteand comparative advantage.


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1. Increased Output from scarce resources In general a country has a comparative advantage in producing a good because of its

endowment of natural resources, so free trade will maximise the output of those goods Resources and Income are allocated into these sectors of the economy, which have the

lowest opportunity cost, and in this way, the economy raises allocative efficiency As output increases, income and GDP increases consumption increases (consumer

more of the goods we do not produce by importing them) and Savings increase2. Increased Specialisation

Economies of scale and savings of size e.g. mass productiontechniques and bulk buying

Improves technical and allocative efficiency (more is producedfor a lower cost)

Reduces cost of buying2. Increased Productivity

Optimal allocation of resources Increases allocative efficiency (allocating resources to their best

alternative to minimise opportunity cost3. Increased Competition

Lower prices, due to price competition Higher real incomes increase in purchasing power as they have

greater income to spend, more wants are satisfied, increasesstandard of living

4. Greater incentive for innovation Increases dynamic efficiency (adopting technology)

Disadvantages of Free trade1. Infant industries newly established firms find it difficult to compete

2. Unemployment Job displacement in uncompetitive industries can lead to structural unemployment

and more regional inequality3. Negative Externalities

Free trade can lead to negative externalities if firms do not pay for the unintended

consequences of their production activities such as higher levels of pollution andenvironmental degradation

4. Dumping

Free trade may lead to unfair price cutting of exports sold at below the domestic pricein foreign markets.

5. Current Account deficit A country pursuing free trade can often experience an ongoing current account deficit

in the balance of payments if it is unable to finance its import expenditure with exportincome

Reasons for protection

1. The infant industry Argument New industries have high fixed and variable costs, which means that they have to

charge a higher price and are uncompetitive, without the protection the industry cant

grow


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Some industries in a country could develop a comparative advantage If only they

could be sheltered from foreign competition for a little while However

Industry becomes built up behind protection

Protection may become permanent

2. Protect Domestic Employment Argument Importing goods exports jobs, tariffs protect import competing industries, which

increases their share of production and employment

In the short term reduction in protection increased structural unemployment;

expenditure and extensive restructuring would be required

In the long term - reduction in protection creating more jobs. Resources are

diverted towards efficiency uses3. Protection against the dumping of imports

Refers to selling a product in a foreign market at a price below its cost of production,

Can cause problems in the importing country of unemployment

Income, resources and employment may reallocate overseas because they are unableto compete against cheaper imports4. Military Self- Sufficiency Argument

Certain industries are considered essential to nation defence and that Australia should

diversify its production into these areas in casse of war Includes shipbuilding, aircraft and communications

Economically requires diversion of resources in inefficient industries

5. Reducing a balance of payments deficit Australia has a large current account deficit and foreign debt and can use tariffs to

reduce import spending and switch to expenditure on domestic goods. Decreases specialisation and due to comparative advantage, misallocation of

resources to less efficient industries increases prices and reduces competition

Methods of Protection and the effects of protectionist policies on the domestic

and global economyTariffs: Taxes placed on goods produced in other nations

Free Trade PositionThis means that demand will fall

No trade price

World price


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Q1 Q2

Effects of Price Falling

Because of a lower world price, domestic producers supply Q1 The consumers want Q2 Importers are supplying Q1-Q2

Effects of a TariffRevenue earned by government

Gain in producer surplus

Loss in consumer surplus

No trade price

World priceDS

Protection effectConsumption effect

Q1 Q2 Q3 Q4

Tariff is a trade protection measure, which provides an artificial advantage to

domestic producers regressive tax on imported goods, raises price of imports makes import goods price uncompetitiveImpact on Consumers

Increase in price paying more for less output

Loss in consumer surplus

Contraction in consumption

Impact on foreign producers

Tariff increased price on imports

Contraction in market share and sale revenue

Selling less for the same priceImpact on protected domestic producers

Increased retail price of imports increased price competitiveness of

inefficient producers increased production

Increase in production output and revenue larger market share

Increased output increased demand increased resource price increased

costs of production of unprotected industry decreasing internationalcompetitiveness

Less efficient production

Reallocation of resources towards less efficient industries reduces the

competitiveness of previously efficient industries


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Decrease in technical and dynamic efficiency as there is no incentive for

innovationImpact on government

Increased revenue from tariffs, incomes and employment

Retaliation by trading partners

Reduce the process of globalisationEffects

1. Income redistribution effect: incomes are taken from overseas producers anddirected to domestic

2. Reallocation of resources effect: L, L, C & E is reallocated from overseasproducers to domestic producers

3. The revenue effect: Revenue (tax x quantity of imports) that flows to thegovernment

Example decrease in Tariffs

Reduction in Car Tariffs from 10-5% in 2010 decrease in price of importedcars

Reallocation of resources domestic resources reallocated on the basis ofopportunity cost

Microeconomic reform of the motor vehicle industry Losers are those that previously had free trade agreements and governments

who lose revenue

Decrease in tariffs greater access to world markets for importers greaterconsumer sovereignty

Structural change Becoming more efficient and increases productivity

Subsidies: cash payments made to local producers to encourage supply in the face of

import competitionS

S1

Price

World PriceD

BA

Q1 Q2 Q3

At the world price domestic supply is Q1 and domestic demand is Q3, therefore Q1 toQ3 is being imported

Subsidies reduce the net cost of production therefore increasing supply Domestic producers are more willing to supply more output at that price


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Decreases imports and increases domestic production Consumers: pay less for more output Government: taxpayer revenue allocated to small sectors of the economy,

encouraging inefficient resources and long run inefficiency Business: income and resources are restored yet misallocated

Advantages of Subsidies1. Growing populations will demand more agricultural commodities subsidies

increase supply to meet the increased demand

2. Guarantee high quality standards resources allocated to where thegovernment wants

3. Self Sufficient internal production meets demandDisadvantages of Subsidies

1. Creates an oversupply demand doesnt necessarily meet the increased

supplymisallocation of resources and allocative inefficiency2. Does not mean better quality

3. An increase in deficit the government loses out by having to pay forsubsidies

Subsidies are preferred to tariffs it is a redistribution of income (income isdistributed from areas with subsidies to areas without.)

It is part of government expenditure and can be annually reviewed Consumers receive the same quantity at the same price A tariff is a regressive tax while a subsidy is paid out of government revenue

collected from a progressive tax system more equitableExamples of subsidies

EU - Common Agricultural Policy subsidies that represent 48% of the

EUs budget, France receives 10.9 billion Euros in subsidies

Quotas supply side form of protection

Quota physical limit on the number of units that can be imported from overseas;

decrease in quota increase in protectionExample: there is a 123, 000 unit quota on the number of 4WD that can be importedinto Australia per yearS

DQ2 Q Q1

P1PriceP2Decrease in quotaIncrease in quota


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Effects of a quota

If a quota is reduced, the price of the good increases greater level of

domestic production Increased Quota, Decrease in price lower levels of protection on domestic

industryDecrease in Quota Winners and losers

Consumer have to pay a higher price decreased consumer surplus Reduces efficiency in domestic industry as there is little competition Importers are unable to import foods Less competition, domestic producers able to supply more

Other Forms of Protection1. Voluntary Export restraints whereby foreign producers agree to voluntarily

restrict the quantity of imports, to say, 10% of total expected sales in themarket. This is achieved by threatening very high tariffs or very low quotas

2. Export Incentives tax concessions if producers achieve certain export

volumes reduce the cost of production e.g. US agricultural exports3. Local Content rules Whereby local firms are given access to lower reduced

tariffs on imports of raw materials or parts provided local materials make up,say 85% of their total material costs

4. Bounties cash payments to producers, paid on a per unit basis e.g. farmersmay receive a bounty of $50 for each tonne of wheat produced

5. Import and Export licenses the government can deny a license to prevent

imports or exports, e.g. wine and branding association6. Technical specification where the government imposes certain minimal

technical standards on imported goods. Importers must comply with safety,health, quality standards

7. Quarantine regulations can restrict imports by enforcing health andagricultural regulations on importers of vegetable, plant and animal products

8. Landing Charges government can import charges to bring goods into thecountry

Effects of Protectionist Polices

Reduced allocative efficiency

Consumer demand is distorted by protection, as prices reflect bothprotection and the marginal utility of consumers, not marginal utilityalone. Resources built up behind protection

Reduced international economic efficiency

Skewed import demands creates less efficient international allocation

of resources Loss of Productive efficiency

Productivity is maximised when long run average cost is minimised,

protection encourages nation based production increased costs Low technical efficiency

Resources allocated to industries with low capital and labour utilisation

Inability to achieve economies of scale


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Reduced Consumer Surplus

Protection increases prices

Dynamic efficiency

Restricts structural flexibility, less able to respond to price changes on

international markets because producers are focussed on domestic

markets Less willing to innovate

Inflation

Absolute increase in the general level of prices and relative inflation affects interest and exchange rates

Employment

Inefficient industry has a domestic focus with low capital and labour

utilisation Limits economic growth and employment opportunities

Contemporary trading blocs and agreements

Multilateral between many countries not necessarily in the same geographic regione.g. WTO and IMFRegional between countries in a region e.g, EU, APECBilateral Between two countries e.g. ANZCERTAMain Forms of Economic Integration

A free Trade Area a group of member countries abolish trade restrictions betweenthemselves but retain restrictions against non member countriesA customs union where member countries abolish trade restrictions betweenthemselves and adopt a common set of trade restrictions against non member

countriesA common market features of a customs union an also allows free mobility oflabour and capital within the common markets countriesA monetary union has the features of a common market and uses a commoncurrency and the co-ordination of monetary policy through a single central bankRoles of Trading Blocs

Can expand the benefits of specialisation beyond national boundaries byreducing or eliminating barriers to trade

Increase in trade leads to Wider choice of products

More competition encouraging allocative, economic and dynamic

efficiency Access to local export markets

Globalisation

Factors or production (capital, enterprise and labour) move from one countrysmarket to anothers

Leads to Wider access to economic growth opportunities

Fewer restrictions on the best use off resources

Increasing economic development, income distribution, decreasing

poverty and literacy issues (link economic growth development)

Trading blocs with a small number of nations can usually finalise negotiationson trade matters more easily than a hundred plus nations


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Trade diversion

Occurs when non-members of the bloc lose export opportunities to less

efficient nations that are members of the blocTrade Agreements

Asia Pacific Economic Co-operation APEC

Regional agreement 21 countries e.g. Aus, NZ, China Established 1989 Aim:

Enhance economic growth and prospects

Develop mechanisms for closer trade

Recent Developments: in 2007 signed the Sydney Declaration on ClimateChange, Energy Security and Clean Development

The European Union EU Regional agreement and monetary union 27 countries e.g. Austria, UK, Poland Established in 1993 Aim

Promote peace and security

Uphold the values of Europeans

Recent Developments: single currency established Preserves comparative advantage and strengthens economic linkages

Australia New Zealand Closer Economic Trade Agreement ANZCERTA Bilateral agreement Countries involved: Australia and NZ Established in 1983

Aim Strengthen the economic relationship

Develop closer economic relations

Eliminate trade barriers

Fair competition trade

Recent Developments: Close collaboration in quarantine, customs transportand business law

North American Free Trade Agreement NAFTA Regional Trade Agreement free trade area

3 Countries, US, Canada, Mexico

US and Canada use Mexican labour. Mexico accesses high income export

markets Enhancement of comparative advantage

Association of South East Nations ASEAN Formed in 2003 Free trade agreement

Promotes comparative advantage, specialisation and economies of scale

International Organisations Affecting Trade

General: Promote policy co-ordination amongst countries Attempt to provide rules for trade and investment transactions Forum for the discussion of trade related issues and disputes

World Trade Organisation WTO Multilateral agreement 153 countries involved


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Established 1995 Aim

Rules based trading framework

Non discrimination

Trade Liberalisation - role of price flows of goods and services and

free market fostering allocative efficiency, production andproductivity increases and comparative advantage throughspecialisation.

Trade disputes

Recent Developments Cut agricultural protection by 30% between 1994 and2001

Trade Round Negotiations Uruguay: Scaled back EU/US farming subsidies by 36% in 2000

DOHA:

Further reductions in agricultural protection Trade concessions from developed countries to developing countries to give them

more market access for their agricultural and manufacturing exports Measures to allow environmental and labour standards to be imposed o trade related

activities In 2006 DOHA trade round collapsed

Cairns Group: pushing at Doha rounds for reduction in subsidies.

Agricultural barriers cost Australia $US 1.5 billion a yearInternational Monetary Fund IMF

Multilateral Agreement maintains financial stability for the promotion ofinternational trade

186 countries involved

Established 1944 Aim

Facilitate a multilateral payments system

Create stable and fixed exchange rates

Remove foreign exchange restrictions

Recent Developments: provided financial assistance for natural disaster reliefin Sri Lanka in 2005

World Bank Evolved from the International Bank for Reconstruction and Development in

1944 Focuses on development assistance for developing and transition economies

Reconstruction assistance for natural disasters Humanitarian relief for post conflict rehabilitation

Social Infrastructure projects in the poorest developing countries

Millennium Goals: provide a climate for growth

Criticisms of International Governance

Criticisms of WTO Completion of the development round seems unlikely

Inequality in Global Trade dye to subsidies slows down the

globalisation process Doha Round April 2006 deadline passed without resolution

The WTO has been ineffective in enforcing compliance among powerfulnations


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Dispute resolution not living up to promise

Process is lengthy and only wealthy countries can afford it

The WTO has double Standards

Wealthy countries use anti-dumping actions to protect their industries

equivalent to a 25% tariff The WTO gives priority to Free Trade over environmental protection

Environmental restrictions on imports have been overturned

The WTO serves the interests of large Transnational corporations

Expansion in the WTO to services trade and foreign investment

reduces the power of national governments and increase the power ofTNCs

Criticisms of the IMF IMFs structural adjustment policies have had negative effects on countries

experiencing financial shakes Focuses on debt restructuring constrains governments ability to

pursue expansionary policies The IMF is controlled by Rich Countries

Funded by countries according to quota

The more you fund, the more votes you receive

The IMF bailouts only help rich investors

Short term loans only delay debt rather than helping developing

nations The IMF is increasingly irrelevant

Private investment funds and many emerging economies have large

foreign exchange reservesCriticisms of the World Bank

World Banks programmes are vulnerable to corruption Policy advice focuses on pro=market policies to nurture foreign investment

Debt relief is an irresponsible economic policy

World bank has increased its debt relief

Has meant that poor countries expect that their debt will be written off

Developing countries will incur more unsustainable debt

Conditionality benefits investors rather than the poor

Conditionality is economic reform in exchange for aid

Pro market reforms benefit TNCs as it gives them access to increased population

OrganisationsOECD organisation for economic co-operation and development

Formed in 1961 and has 30 members Objectives

Promote sustainable economic ad employment growth

Increase living standards

Maintain financial stability

Contribute to world economic development

G7 the group of seven USA, Japan, Germany, UK, France, Italy, Canada seven largest democratic

market economies Account for half of the worlds GDP, trade and financial flows

Discuss international economic and trade issues


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Co-ordinate strategies and macroeconomic policies to overcome

specific international economic problemsG8 summits 2005-2009

G7 and Russia Agreed to an increase in foreign aid to developing countries by $50b in

2005 Cancelled the multilateral debt of $100b of the poorest countries

Discuss reductions in greenhouse gas emissions

G20 Summits in 2008 - 2009 Referred to as the new world economic order In 2008

Leaders discussed measures to re-capitalise the world financial system

and strengthen the regulation of global financial markets, includingderivatives trading and hedge funds

In 2009 Pledged $1 trillion in loans and guarantees to affected countries and a

massive boost to trade finance to help developing nations with theirexports during economic crisis

OPEC Organisation of Petroleum Exporting Countries Oil Cartel consisting of 12 major oil producing countries Power is derived from its ability to set oil prices and cause production costs to

rise in oil importing nations Use its power as a political tool in 1973 rose oil prices to the US in

response to their stance on Israel

War in Iraq an increase in oil prices due to supply constraints and risingdemand

Higher oil revenue boosted the trade surpluses if OPEC countries

increasedimports and investment

Impact of globalisation on the standard of Living in the global economyVariations in the standard of living in the global economyStandard of living can be compared in terms of GDP or income per capita and otherindicators including adult literacy, nutrition, energy consumption and health serviceswhich measure quality of life.

World Production and its distribution

Total world production is $US 69700 billion

Low income nations: 9.5% of world production 36.9% of global population

Medium Income nations: 34.9% of world population 47.6% of global population

High income nations: 55.9% og word production 15.5% of global population

GDP per capita (2006)

Low development counties: US$ 1,199

Medium Development countries: US$3,829

High development countries: US$25,100

Doctors per 100.000 people

Low development countries: 25 doctors


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Medium development countries: 145 doctors

High development countries: 300 doctors

Energy Consumption

Low development countries: 134 kw per capita

High development countries: 7,518 kw per capita

Economic growth and developmentEconomic Growth

Sustained increases in real GDP over time

Quantitative measure

Has two main sources

Increased use of land, labour, capital and entrepreneurial resources due

to better technology Increased productivity of existing resources

Economic development

Structural changes needed in an economy for economic growth to occur

Qualitative measure

Transformation of an economy from a rural based agricultural society to an

industrial based urban society Change in the composition of the workforce due to increasing specialisation

Growth and development derive from production, income and expenditureReasons for the development gap between nations

Population factors

A well educated population will increase occupational mobility and

human capital Healthcare

People are motivated by material incentives

Capital accumulation: investment In order to grow, an economy needs to divert some resources away

from current production to produce capital goods The process of adding to the capital stock of a nation is known as net

investment Gross investment is the sum of net investment and depreciation

As the population increases, more capital is required to equip it so as to

maintain production. This process is known as capital widening theamount of capital per worker stays constant

If the economy produces capital at a faster rate than the population

grows, this is known as capital deepening Capital deepening promotes higher economic growth rates while

capital widening is necessary to maintain current real GDP per capita Technological process

Involves the introduction of new and better techniques of production in

order to raise the productivity of the economy, i.e. output per workerper unit of time

Technological progress is usually associated with new capital

equipment and hence involves investment (embodied technicalprogress)

Technological progress can be introduced by improvements in the

education, skills, health an organisation of the labour force.(Disembodied technical progress)


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Institutional factors

Characteristics of certain societies that dont promote growth

No or unreliable bankruptcy laws The extent of political control over the movement of people or goods The degree of public ownership of resources

Export industries Allow increased specialisation and use of larger-scale production by

utilising larger foreign markets Exports may also enable escape from the restrictions of low domestic

demand Structural change may be accelerated through trade

Economic Systems

Developing economies

Deal with the economic problem through the use of markets, (except

central government planning in China) Has poor allocative efficiency and requires government to overcome

obstacles to economic growth and development i.e. infrastructure In the process of raising their rates of economic growth and

development, have lower incomes and living standards E.g. India, China, Brazil, Nigeria

Newly Industrialised Countries

Market system of allocation: government have also intervened to

encourage the development of high technology export industries Invested heavily in education and training and encouraged domestic

saving and investment E.g. Singapore, Taiwan, South Korea, Hong Kong

Transition Economies Former capitalist countries in Easter Europe which are in transition to

market capitalism through the creation of free markets and pricedeterminations

E.g. Russia, Poland, Hungary

High Income Economies

Have market economic systems characterised by the private ownership

of resources and the price mechanism as the main instrument ofresource allocation and the distribution of income. Driven by profit andconsumer sovereignty

Government role confined to welfare, public goods, economic and

social infrastructure and the conduct of economic policy Examples, US, Japan, Germany, UK, France, Italy

Impact of Globalisation

International Convergence Tendency for the various types of world economic systems to converge under

globalisation Majority of countries have adopted market economic systems with limited

government intervention, or are in the process of transition from socialistcommand planning to capitalism

Forces promoting the convergence of the economic systems

Spread of similar technologies and economies of scale in production The growth of international trade and investment


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The customisation of products and a new age of consumerism Improvements in technology and communications linking all parts of the globe The increased levels of migration

Economic Growth, development and the quality of life Trade used to boost growth and development

Korea: since 1969, life expectancy has risen from 54 years to 74 years, 98% of adultsare literate and infant mortality has fallen from 85 per 1,000 live births to just 6

Pakistan and Uganda: exports growth of 8% between 1985 and 1997, economicgrowth was modest and there was little development

No automatic link between trade and growth. Requires domestic reforms such

as effective conduct of economic policy High Income OECD countries, East Asia and Pacific: sustained economic growth and

rising real income being translated into improvement sin human development Twenty Countries have experienced reversals in their HDI since 1975, of which

thirteen are in Sub Saharan Africa HIV/AIDS epidemic on life expectancy

Trade, Investment and transnational corporationsTrade:

Trade grew twice as fast as global GDP in the1990s Greater composition of ETMs, services and intellectual property Australias trade dependency rose from 34% - 44% GDP (1980-2000)

Investment Investment directed to emerging market economies e.g. China, providing

capital injections which promote industrialisation, modernisation, urbanisationand economic development

TNCs TNCs invest in developing and emerging economies (China and India) to take

advantage of high economic growth rates, cheap labour and less stringentoccupational heath and safety and environmental standards

Distribution of Income and Wealth Rewards of globalisation are not shared equally

OECD countries with 19% of global production have 71% of global

trade in goods and services, 58& of foreign direct investment and 91%of all internet users

In China gini- coefficient has risen from .3 in 1978 to .48 in 2007

Globally developed nations take advantage of impoverished Income heads to resource owners. Creates larger growth in urban areas.

However, this comes with the exploitation of cheap labour China: 620 million pulled from poverty since 1980, poverty from 84%

to 16% Poverty rate in Sub-Sahara Africa only ell from 53.4% to 50.9%

Environmental consequences Industrialised countries

Have created many of the global environmental problems by

destroying much of their own biodiversity and over exploiting fisherieson a global scale

Have high levels of energy use and green house gas emissions

Developing countries: Pursued economic development at the cost of the environment -

caused deforestation and desertifications


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Pollution costs China 8-12% of GDP p.a

Globalisation created global conscience Carbon Pollution reduction scheme and Kyoto protocol

Multilateral companies transfer capital and environmentally damagingprocesses to countries with low regulation

Financial Markets Globalisation has brought rising flows of funds between nations especially

portfolio investment. Through Stock exchanges, government bonds, corporate bonds

Advantages Savings are more readily available in the Worlds financial markets

Nations with large investment projects can often find funds more

easily and cheaply (lower interest rates) than in the past A higher level of investment expenditure raises future production

levels and future standards of living Disadvantages

The Dominance of savings flows over trader related transactions in

foreign exchange markets will produce difficulties for exporters andimporters

A loss in confidence of savers (Asian Financial Crisis 1997-99) and

investors (GFC) can cause sharp fluctuations in exchange rates Nations which offer inferior returns or greater risk will find it more

difficult to attract adequate savings for the economic developmentplans

International Business Cycle Dependency on trade through globalisation means individual countrys

business cycles will be heavily influenced by the international business cycle The greater international involvement, the greater the influence of

international fluctuations Examples

Asian Financial crisis in 1997 and its impact on demand reduced world

growth from 4.2% in 1997 to 2.8% in 1998 2001- 2008 Australia resources boom from strong US and Chinese

growth Collapse in US housing industry resulted in a fall in world growth

from 3.6% in 2003 to -1.3% in 2009Government Economic Policies

National economic policies require flobal focus to reap the benegits ofglobalisaiton

Issues: Reducing trade barriers for agriculture and services

Microeconomic reform endeavours to make domestic producers

competitive in international markets Banking reforms and capital market regulation to prevent volatile

capital flows Strategies to address global problems

Climate change, deforestation and industrial pollution Poverty: food security, housing, water, sewerage, transport, health and education

CHINA Case Study

Trends


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Economic growth of 8-10% per year for the last 15 years Joined WTO in 2001. Exports grew 3times (2001-2008) to $1420b Inflation peaked at 5% p.a., but steadied at 1% p.a Rural unemployment 16%, Urban unemployment 4% Current account Surplus, traditionally 10% of GDP, steadied at 7%

Gini- Coefficient increased from .3 in 19778 to .46 in 2004 Spatial inequality due to special economic zones 400 million escaped poverty since 1980 HDI increased from .62 (1990) - to .78 (2009) As of 2005, life expectancy had risen to 72.5 years and literacy had improved

to 90%.Policy for growth

Tariff Reforms China cut tariffs from 35% to 10% (1990 - 2004)

Encourage greater domestic efficiency sent price signals to industries remain competitive firms were forced to raise efficiency and productivity. Allocation of resources through the principle of comparative advantage to

their minimum opportunity cost.

90% of Chinas exports are from manufacturing, exposes itself tocompetitive export markets.

Fixing of the Yuan managed peg The new exchange rate has appreciated in value, forcing increases to domestic

efficiency, which enables long-term productivity gains Chinas Yuan is undervalued by 15-25%, which decreases the price of exports

and increases the price of imports, protecting domestic industry by loweringcompetition.

As of June 19 2010, proposed to end its peg to the US dollar, this will giveother countries better trade competabilityClosing down of inefficient and unproductive State Owned Enterprises

privatisation of industries and joint ventures from overseas companies. The private sector now controls 50% of the economy, up from 17% in the

early 1990s.WTO

Raised potential export markets Increased Chinas access to foreign savings and markets and the level of funds

entering the economy Profit price signals raised investment

Export base expanded to include more ETMsAgricultural Reforms

(1978 1994): Houseold responsibility system replaced commune sustem Households could sell surplus produce invigorating enterprise. Raised

production raised income GDP increased from $US 220 billion (1978) - $US 490 billion (1994)]

Open Door Policy Special Economic Zones provided incentive for foreign direct investment with

low tax, cheap labour and import duty exemptions Investment bought in technology and capital that raised productive capacity

and hence exports. Exports have grown at 17% p.a

Productivity growth According to the IMF: Productivity accounts for 50% of Chinas growth


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Reduction in tariffs and abandoning fixing of the Yuan through raisedtechnical ad allocative efficiency

Development

Political Factors State run communist system to a hybrid form of market socialism

Improved Chinas social structure by redistributing income through increasedprivate ownership

Social Factors Increased utilisation of labour, has led to more women in the workforce China has improved from 96th to 72nd in the UN gender empowerment measure

Environmental Factors Rapid economic growth has forced China to increase its stance on

environmental protection from 0.8% in 2001 to 1.3% in 2005 Losing 8 12% of GDP a year to environmental degradation.

Development Policy

One Child Policy Greater GDP shared about a smaller population Income increased from $410 (1980) to $5900 92005) whilst 400m

pulled from poverty since 1980 Welfare framework and direct investment

400b Yuan Great Western Development:

Halting rising Gini-coefficient at .46

Minimal Capital Guidelines Resource use per Unit of GDP is 3x US

Capital guidelines for oil and water attempt to internalise the

externality

Future Economic Growth

Move from investment and import led growth towards household

consumption retail sales rose 18.7% in may 2010 China: 30% of GDP is shared domestically whilst US household

consumption represents 76% of GDP Unemployment

Unemployment elasticity is .13 GDP owing to industrial nature of

employment 10 million workers enter workforce each year, employment

opportunities are limited

Spatial Inequality Income per province varies between 8000RMB and 400RMB

Avoid potential social divisions and political divisions

Inflation High economic growth has led to continuing inflationary pressures.

This occurred in 2007 with tighter monetary policy used to raiseinterest rate and tighten lending

Government has target of 3% however this was breached in May 2010

The move of the Yuan away from a Peg will help reduce inflationary

pressures

Documents

Annie Unsworth - Economics Topic 1.Docx[1]