Annie Unsworth - Economics Topic 1.Docx[1]

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


    Topic 1 The Global EconomyFeatures of the global Econo


    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

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


    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


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


    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


    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

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


    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