International economic integration

The Global Economy: Where economies of individual countries are linked to each other and changes in a single economy have ripple effects on others

Gross World Product: The aggregate value of all goods and services produced worldwide each year in the Global Economy.

Globalisation: The increased integration between different countries and economies and the increased impact of international influences on all aspects of life and economic activity. Global economies are more integrated now - result of technological improvements and resources. Major indicators of integration are:

● International trade in G&S ● International financial flows ● International investment flows and Transnational Corporations ● Technology transport and communication ● The movement of workers between countries

Trade in G&S: ● Measure of how G&S produced in an economy are consumed in other economies

around the world. ● Grown rapidly in recent years; from 37% of global output to 50%. ● Annual growth in trade is generally 2x the level of economic growth. High volume of

trade ● Growth in trade volume shows that economies don’t produce all items they need or

as efficiently as other economies ● Also grown due to new technologies in transport and communications - reduced

costs ● Composition of trade can have impact on individual economies - movement from

manufactured goods to services ● Direction of trade flows changed - reflection of changing importance of different

economic regions

Financial flows FOREX: markets which are a network of buyers and sellers exchanging currency to facilitate financial flows between countries

International Monetary Fund (IMF): international agency - 189 members - oversees the stability of Global financial systems. Major function is to ensure stability of exchange rates, exchange rate adjustment and convertibility.

● Finance is crucial to how economies work ● Globalisation of finance has linked economies ● Finance - most globalised sector of world economy (money moves faster than G&S) ● International financial flows expanded following deregulation in 1970s-80s ● Controls on forex, flows of capital, interest rates and overseas investments were lifted ● New technologies and global communications network - linked financial markets ● Main drivers of global financial flows are speculators and currency traders ● (+) Allow countries to obtain funds that are used to finance domestic investment ● (-) Speculative behaviours can create volatility in forex markets and domestic

financial markets due to herd mentality

Investment and Transnational corporations: Foreign Direct Investment (FDI): movement of funds between economies for the purpose of establishing a new company or buying a substantial proportion of shares in an existing company (more than 10%). FDI is generally considered to be a long-term investment and the investor normally intends to play a role in the management of the business.

● Measure of globalisation of investment is FDI ● Rapid growth of investment in the past 2 decades is indicator of economic growth ● Can be split into 2 types; the shorter term speculative shifts of money as finance and

the longer term flows of money to buy or establish investments ● Since late 1970s there has been a rapid growth of movement in capitals ● Expansion of FDI involves movement of funds that are directly invested in economic

activity ● Reforms in countries led to a surge in FDI flows - 1980s onwards ● FDI flows are strongly influenced by level of economic growth ● Developed countries were favoured for FDI flows pre 2010 ● Significant cause of increase - increased number of mergers and takeovers ● Accounts for ~20% of total investment

Transnational Corporations (TNCs): global companies that dominate global product and factor markets. They have production facilities in at least two countries and are owned by residents of at least two countries.

● TNCs play vital role in global investment flows ● Often have production facilities in countries worldwide - sourcing in one country,

manufacturing in another and packaging and marketing in another ● As they establish or expand production - bring foreign investment, new technologies,

skills and knowledge ● Since 1990s, TNC number went from 37000 to 104000 - employ over 79 million

people

● As TNCs increase in volume and significance - increase in cross border cartels - reducing competition

Technology, transport and communication: ● Technology facilitates the integration of economies:

○ Developments in freight technology - containerisation, cargo tracking - more efficient logistics lead to greater trade in goods

○ Cheaper and more reliable international communications - broadband - leads to provision of services worldwide

○ Computer and communications network - money can be moved within fraction of second

○ Smartphones and mobile internet access - change structure of industries (online shopping)

○ Advances in transportation - greater labour mobility and travel ○ Internet is communications backbone - greater communication within and

between firms and also reduces business costs that have been a barrier to integration

International division of labour and migration: Migration: movement of people between countries on a permanent or long-term basis, usually for 12 months or longer. International division of labour: how the tasks in the production process are allocated to different people in different countries Global supply chain: when producers have production facilities in several countries

● Labour markets are less internationalised than other markets ● World bank estimates that there are ~258 million people (3x 85 million in 1990) who

migrated to work in different countries of the world ● People migrate as a result of better work opportunities, political unrest and conflict ● EU, US and Australia have driven increase in immigration ● Proportion of migrants leaving developing countries and heading to high-income

countries rose from 36% to 51% in past 20 years ● Low-skilled labour is often inhabited by migrants - require basic skills and no

language ● Corporations also move their production in search of most efficient and cost effective

method

The international and regional business cycles

Business cycle: refers to fluctuations in the level of economic growth due to either domestic or international factors Gross domestic product (GDP): total market value of all final G&S produced in an economy over a period of time International business cycle: refers to the fluctuations in the level of economic activity in the global economy over time. Regional business cycle: fluctuations in level if economic activity in a geographical region of global economy over time

● Level of economic activity in economies is never constant ● These ups and downs in the business cycle are caused by changes in the level of

aggregate supply and demand ● For most countries, economic growth is stronger when the rest of the world is

growing stronger ● RBA states that around 63% of level of output in Australia can be traced to interest

rates, growth levels and inflation rates Factors that strengthen the international business cycle:

● Trade flows: level of growth in an economy will have flow on effects on economic activity of trading partners

● Investment flows: economic conditions in one country will affect whether businesses in that country will invest in new operations in other countries, affecting economic growth

● TNCs: are increasingly important means by which global upturns and downturns are spread through the global economy

● Financial flows: countries with strong financial integration will experience an increase in financial flows between themselves

● Financial market and confidence: consumer confidence and spirit of investors is influenced by conditions in other countries - strong correlation between movements in share prices of major stock exchanges

● Global interest rates: monetary policy conditions in individual economies are linked to interest-rate changes in other countries

● Commodity prices: global prices of key commodities - critical role in general level of inflation

● International organisations: discussions of global economic conditions mean that these organisations can coordinate macroeconomic policy

Factors that weaken the international business cycle:

● Interest rates: have effect on economic activity and vary between countries (or regions)

● Government fiscal policies: have significant effect on levels of economic activity in short to medium term

● Exchange rates: differ between countries and impact levels of trade competitiveness and confidence

● Structural factors: differ between economies (innovation, attitudes, age distribution) ● Regional factors: differ. Some countries are integrated w/ neighbours and therefore

influenced by trading partners Regional business cycles:

● US economy - ripple effects on rest of North America ● East Asian region - influenced by China and Japan - regional business has

strengthened in past 0 years because of increased integration ● Developing countries - dependent on high income countries for more than 80% of

their income - therefore more influenced by donor ● Tend to be dominated by largest and most globalised economies but are still more

complex

Trade, financial flows and foreign investment:

Basis of Free trade - advantages and disadvantages Free trade: Situation where governments impose no artificial barriers to trade that restrict the free exchange of goods and services between countries with the aim of shielding domestic producers from foreign competitors Comparative advantage: The economic principle that nations should specialise in the areas of production in which they have the lowest opportunity cost and trade with other nations so as to maximise both nations’ standards of living. Developed by David Ricardo in 1817. Absolute advantage: Developed by Adam Smith in his 1776 publication ‘The Wealth of Nations’. Absolute advantage is where a country, with a given amount of resources can produce more output than another country with the same level of resources. Opportunity cost: Represents the alternative use of resources. Often referred to as the “real” cost, it represents the cost of satisfying one want over an alternative want. This is known as the economic cost.

Advantages of free trade: ● Allows countries to obtain G&S that they cannot produce themselves or in sufficient

quantity to satisfy domestic demand - lack of adequate resources ● Allows countries to specialise in production of G&S in which they are most efficient -

better resource allocation and increased production ● Encourages efficient allocation of resources ● More specialisation - leads to economies of scale - lower costs of production ● International competitiveness improves ● Encourages innovation, spread of technology and processes ● Leads to higher living standards (result of lower prices and higher efficiency,

increased consumer choice) Disadvantages of free trade:

● Increase in unemployment - domestic businesses may find it hard to compete with imports - short term UE - corrects itself in long-term if economy redirects resources to areas of production in which they have comparative advantage.

● May be more difficult for less advanced economies to establish new businesses & industries if they are unprotected

● Production surpluses may be dumped which can hurt domestic industries ● Encourages environmentally irresponsible production methods - everyone wants to

undercut costs

Role of international organisations:

World Trade Organisation (WTO): Role is to advance global trade agreements and to resolve trade disputes between economies

● Formed in 1995 ● Prior to WTO responsibility for developing trade agreements was with General

Agreement on Tariffs and Trade (GATT) (1947) - weakness was that there was no effective way to enforce the trade agreements

● Main aims: ○ Liberalisation of trade ○ Non-discrimination ○ No unfair encouragement for exports

● It deals with trade in goods, services and intellectual property rights ● A process of dispute resolution is commenced - no solution = WTO panel ● Its efforts to conclude a comprehensive global trade agreement have been

unsuccessful ● However, general levels of protection have decreased ● Has managed to reduce domestic production subsidies in agriculture, decreased

pirating and created open services markets

○ Doha Rounds wanted to reduce agricultural protection, lower tariffs on manufactured G&S and reduce restrictions on trade - failed due to disputes between developed and developing economies

● 164 member countries and 23 countries negotiating to join

International Monetary Fund (IMF): Role is to maintain international financial stability, particularly in relation to foreign exchange markets

● 189 members ● Earlier role was to oversee a system of fixed exchange rates - role expanded when

fixed exchange rates crashed ● When crisis occurs - IMF develops “rescue package” ● During the GFC

○ Supported expansionary macroeconomic policies ○ IMF injected $USD 250 million into global economy to promote liquidity ○ Provided support to countries that were hit hard by the crisis ○ Suspended interest payments on some loans for developing nations

● Policies: ○ Support free trade of goods and services ○ Free movement of finance and capital throughout world markets ○ Structural adjustment - change economic policies and open markets

World Bank: role in the global economy is primarily concerned with helping poorer countries with their economic development

● Goals: ○ Reduce extreme poverty to less than 3% by 2030 ○ Reduce inequality by fostering income growth for world’s bottom 40%

● Internal organisations: ○ International Development Association: provides “soft loans” (loans at little to

no interest for developing countries) ○ International Finance Corporation: attract private sector investment to Bank’s

projects ○ Multilateral Insurance Guarantee Agency: provides risk insurance to private

investors ○ International Centre for Settlement of Investment Disputes: conciliation and

arbitration of investment disputes between states, and corporations ● Funded by contributions by member countries and its own borrowings

United Nations (UN): ● Established in 1945 ● 193 member states

● Covers global economy, international security, environment, poverty and development

● Decision making powers are limited - relies on support of its member states ● Oversees development of human rights and political freedoms ● Created ‘global goals’ - aims to reduce poverty and inequality between 2015-2030

Organisation for Economic Cooperation and Development (OECD): role is to conduct and publish research on a wide range of economic policy issues and to coordinate economic cooperation among member nations

● 36 member countries ● Goal: promote policies to achieve highest sustainable economic growth and

employment and a rising standard of living in member countries while maintaining fiscal stability

● During GFC: proposed internationally conducted macroeconomic stimulus

Influence of government economic forums: Play important role in coordinating policies between major economies during times of economic or financial crises.

G20: ● 19 of world’s largest economies and EU ● 80% of world GDP and ⅔ of the world’s population ● Has annual summit ● Emerged as leading forum during GFC to avoid depression:

○ Agreed to coordinate fiscal stimulus ○ Improve supervision of global financial system and international financial

institutions

G7: ● Formed in 1976 ● Group of 7 largest industrialised nations - US, UK, France, Germany, Canada, Japan,

Italy ● Effectively operates as economic council of world’s wealthiest nations ● Unofficial forum coordinating macroeconomic policies ● Includes political issues and priorities such as climate change, poverty and security ● Significance has shrunk due to:

○ Power being shifted to China ○ Nationalistic posture of US

G8: ● Group of 8 largest industrialised nations - US, UK, France, Germany, Canada, Japan,

Italy, Russia ● Annual meeting ● Russia left G8

Trading blocs, monetary unions and free trade agreements: Trade bloc: occurs when a number of countries join together in a formal preferential trading agreement, to the exclusion of other countries. NAFTA, EU. Monetary union: a group of economies with no restrictions on financial flows between their economies Free trade agreements: formal agreements between countries designed to break down barriers to trade between those nations. Bilateral: agreement between two countries Multilateral or regional: agreement between three or more countries

● They are called ‘free’ trade agreements - more accurate to call them preferential because they give favourable access to goods and services to certain nations

● Free trade agreements through the WTO are designed to remove these barriers

Trade Agreements:

Multilateral / Regional Bilateral Global

EU NAFTA APEC ASEAN AANZFTA

CERTA (NZ - Aus) SAFTA (Singapore - Aus) TAFTA (Thailand - Aus) AUSFTA (US - Aus) ACI-FTA (Chile - Aus) MAFTA (Malaysia - Aus) KAFTA (Korea - Aus) JAEPA (Japan - Aus) CHAFTA (China - Aus)

World Trade Organisation

Asia-Pacific Economic Cooperation (APEC) Forum:

● Formed in early 1990s as response to other trading blocs ● Meet annually

● 21 member economies: Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, US, Vietnam

● Accounts for 60% of World GDP ● Accounts for 47% World Trade (2017) ● Intended to reduce trading barriers to non-member countries as well

(non-discriminatory) - never managed to achieve this goal ● Average tariff levels have fallen

Trans-Pacific Partnership (TPP-11)

● 11 Pacific Rim countries ● Formally ratified in 2018 ● Represent Around 15% of global trade ● Comprised 22% of all Australian trade ● Suffered when US withdrew from agreement

Association of Southeast Asian Nations (ASEAN): Covers emerging and developing economies in South-East Asia.

● Acts as a counter-weight to the APEC forum ● Has become most effective force for trade negotiations in Asia Pacific region ● ASEAN Free Trade Area (AFTA) includes Indonesia, Thailand, Malaysia, Singapore,

Philippines, Vietnam, Brunei, Burma, Cambodia and Laos ● The ASEAN Australian-New Zealand Free trade Area (AANZFTA) agreement took

effect in 2010 - nations committed to lowering and eliminating tariffs on 96% of Australian exports to the region

● Largest preferential agreement that has included Australia The European Union (EU):

● Most important trade bloc in world economy ● Member countries are across European continent ● 28 member countries ● 5 additional countries negotiating potential membership: Albania, Montenegro,

Macedonia, Serbia, Turkey ● Weakened by UK’s decision to leave ● Formation in 1950s helped break trade barriers in Europe ● EU has frequently used tariff barriers against non-members - accusations that EU is

closed ● Increase in protection - implications for non European countries

North American Free trade Agreement (NAFTA)

● Established in 1994 with US, Canada, Mexico ● Agricultural protection is to be completely eliminated and other tariffs to be eliminated

in 5-15 yrs ● Tripling of trade in past 2 decades ● Reflect concerns that American workers have lost jobs as manufacturing has led to

Mexico

● Group of 34 nations in North and South America agreed to create wider free trade in entire American continent (2001)

Bilateral trade agreements:

● Increase in bilateral agreements in recent years - slower progress of WTO’s negotiations

● Often decrease overall potential of trade ● Often time and resource consuming

Closer Economic Relations Trade Agreement (CERTA): Elimination of trade restrictions between NZ and Australia

● Began in 1983 ● Gradually extended, harmonisation of business regulations and tax laws ● Contributes annual increase of trade of around 8%

Protection:

Reasons for protection: Protection: refers to government policies that give domestic producers an artificial advantage over foreign competitors, such as tariffs on imported goods. Dumping: practice of exporting goods to a country at a significantly lower price than their selling price in their country of origin Infant industry argument:

● New industries face difficulties and risks ● Start out on small scales with costs higher than established competitors ● Need to be shielded in short run to build capacity, establish markets and achieve

economies of scale ● Protectionist policies need to be removed otherwise there’s no incentive for industry

to be efficient ● Gov’t should only provide protection to industries with good chance of comparative

advantage Prevention of dumping:

● May be used to dispose production surpluses or establish market position in another country

● Usually temporary but harm domestic producers - may be forced out of business - lower productive capacity - higher unemployment

● Only benefit - lower prices for consumers in short term Protection of domestic employment:

● If local producers are protected from competition with foreign imports the demand for local goods rises - more employment

● In long run - leads to higher unemployment - protection distorts allocation of resources

● Protectionist - leads to retaliation - country maintains employment in less efficient protected industries and lose employment in more efficient export industries

Defence and self sufficiency:

● Sometimes want to stay self sufficient for national security or survival reasons during particular times

● Some countries don’t import weapons because they don’t want to be reliant for national security

Environmental factors:

● Sometimes block trade in goods because of environmental factors ● Overseas producers don’t comply with same environmental standards that apply in

advanced economies.

Methods of protection: Tariffs: Taxes on imported goods imposed for the purpose of protecting Australian industries. GOAL: raise prices of imported goods, making domestic producers more competitive Economic effects of a tariff include:

● Domestic producers provide greater quantity of good - stimulates domestic production and employment

● More domestic producers attracted to protected industry - reallocation of resources to less efficient producers

● Consumers pay a higher price and receive fewer goods - redistributing income from consumers to domestic producers

● Raises revenue for the government (not the goal). The more effective tariffs = less revenue for government

● Retaliation effect Quotas: Restrictions on the volume of a good that is allowed to be imported over a given period of time. GOAL: guarantee domestic producers a share of the market Economic effects of a quota include:

● Domestic producers supply greater quantity of good - stimulates domestic production and employment in protected industry

● More resources attracted to protected industry - reallocation of resources from other sectors - production and employment fall

● Consumers pay higher price for lesser goods - redistributes income away from consumers to producers

● Doesn’t directly generate revenue but sometimes raise revenue through selling import licenses

● Retaliation effect Subsidies: Cash payments from governments to businesses to encourage production of a G or S and influence allocation of resources in an economy. GOAL: to help domestic businesses compete with overseas produced goods and services Economic effects of a subsidy:

● Domestic producer supply greater quantity of good - stimulates domestic production and employment

● Reallocation of resources to protected industry - fall in employment and production in other sectors

● Consumers pay a lower price and receive more goods - they indirectly pay through taxes

● Impose direct costs on government budgets ● Can be abolished more quickly since they impose costs

Local content rules: Rules specifying that goods must contain a minimum percentage of locally made parts. In return, the imported components may not attract a tariff. Export incentives: Give domestic producers assistance through grants, loans or technical advice and encourage businesses to penetrate global markets or expand their market share.

● Popularity of this protectionist technique has grown because it doesn’t directly affect domestic production and efficiency

● Doesn’t protect businesses from foreign competition ● Artificial barrier to free trade

Overall economic effects of protectionism:

● Overall reduction of trade between nations ● Reduce living standards ● Reduce global economic growth by shielding inefficient producers ● Make it more difficult for economies to specialise in production where they are most

efficient ● Businesses are less able to achieve economies of scale - lower profits and dividends ● Less competition - higher prices of goods and services ● Trading blocs have negative effect for developing countries that are excluded from

access to markets of advanced economies

Globalisation and economic development

Differences between economic growth and economic development:

Economic growth: Quantitative measure of the increase in real GDP over a period of time. A rise in economic growth indicates an increase of the nation’s economic capacity.

● Refers to higher national input - quantitative measure ● Looks at amount that output has changed, rather than looking at effects of the growth ● Often looked at through GDP or real GDP ● GDP has increased = economic growth (the country has produced more G&S and its

productive capacity has expanded)

Economic development: Process whereby there is a sustained increase in the living standards of a country. Is indicated by improvements such as education and health.

● Process of improving living standards ● Uses indicators such as HDI and Human Suffering Index - take into account GDP per

capita ● If economy grows - government will spend more money on health and education ● Requires an analysis of its impacts on the population’s quality of life

Distribution of income and wealth: Unequal distribution of income and wealth is one of most worrying effects of globalisation Purchasing Power Parity (PPP): Theory that states that exchange rates should adjust to equalise the price of identical goods and services in different economies around the world

● High income countries receive around ⅔ of world’s income - half of world’s income using PPP adjusted GNI figures

● High level of inequality - high income economies only make up over 1 billion of population

● Low income economies = 10% of global population but <1% of global economy size ● GNI per capita shows people in high income figures enjoy income that is 5x larger

than those in low and middle income countries ● 1% of population owns more than half of the world’s wealth

● In short term:

○ Inequality is beneficial to wealthy, advanced economies as their companies don’t face serious competition

○ Competitive industries cannot develop due to inadequate domestic base of investment capital

○ Many countries remain dependent on foreign aid

● In long term: ○ Negative consequences for entire world ○ If developing countries become more competitive - lower prices - higher

quality ○ If they become viable producers there will be more efficient allocation of

resources ○ Less inequality is beneficial for entire world growth

Income and quality of life indicators: Quality of life indicators: Qualitative and quantitative measures used to judge the standard of living within countries. Standard of living refers to conditions in health, education and GDP per capita.

● Difficult because so many factors and statistics can affect the standard of living ● Life expectancy, infant mortality, child malnutrition, poverty.

HDI takes into account:

● Life expectancy at birth ● Levels of education attained ● Gross national income per capita

Developing economies, emerging economies, advanced economies Important to note that classifications are broad and can group dissimilar economies together.

Emerging economies: Are in process of industrialisation or modernisation and experiencing sustained high levels of economic growth.

● Fast growing income countries ● Income levels vary ● Moving from developing countries to advanced economies

● Improving GDP per capita and living standards ● Lower living standards ● BRIC, Malaysia, Philippines, Chile

Advanced economies: Countries that have high levels of economic development, close economic ties with eachother and liberal-democratic political/economic institutions.

● High income countries ● Very high living standards - high HDI and education ● Highly industrialised ● Large manufacturing sector in comparison to agricultural ● Growth in service sector ● North America, Western Europe, Japan, Australia, New Zealand, Korea

Developing economies: Generally have low income levels per capita, human resources and health outcomes. Only experience industrialisation to an extent.

● High levels of income inequality ● Dependence on agriculture ● Reliance on foreign aid for income ● Low levels of labour productivity, industrialisation, technological innovation and

infrastructure development ● Undemocratic - lots of corruption ● Africa, South America, Asia

Low growth:

● Remain poor ● No improvement in living standards ● Social and political problems ● Ineffective domestic policies ● Inequality in natural allocation

Type of economy

Income levels Economic growth

Structure Examples

Advanced High income levels with GNI per capita above $12,235

Slower growth in recent decades

Large service industries and advanced manufacturing

Singapore Portugal Czech republic

Developing Low income levels with around half of

Moderate growth rates but

Heavily reliant on agriculture

Madagascar Yemen

population in absolute poverty

population growth also high

and foreign aid Myanmar

Emerging Income levels vary but there is fast growth in income levels

Strongest growth rates (5-10%)

Industrialising usually with substantial manufacturing sectors

China Brazil Indonesia

Reasons for differences between nations:

Global factors:

Global trade systems:

● Wealthy countries protect their agricultural sector - developing countries are affected ● Regional trading blocs exclude poorer nations from gaining access to global

consumer markets ● Doha rounds - wealthy economies conceded in areas that would benefit developing

countries ● Developing economies can’t enjoy free trade - costly to participate

Global financial architecture:

● Short term financial flows favour emerging economies - better financial returns - exposed to volatility

● FDI flows have shifted towards fast-growing emerging economies ● International financial rules ● IMF’s structural adjustments have served the interests of rich countries

Global aid and assistance:

● Level of development aid was 0.3% of GDP - less than half of level promised ● Critics say that aid doesn’t actually help development - phantom aid

Global technology flows:

● Can both lessen and entrench inequalities ● Technology is quickly adopted in economies with better infrastructure, education ● Less useful to developing countries with abundant labour, young population

Economic resources:

Capital:

Having access to funds necessary for production.

● May be used for a range of purposes.

● Countries with rich supply of capital = richer and more productive because they can invest in more efficient technology.

● Capital rich countries specialise in manufacturing = value-added production.

Labour economies:

Refers to workers in a country. Amount of workers and quality of labour supply are important. Can both be improved by government policies:

● Quantity: major role in determining what kind of production economy will specialise in. Government has limited ability to affect quantity of workers, can provide incentive to join labour force.

● Quality: refers to attribute if workers skill, education and qualifications. High income countries tend to have highly educated and skilled labour resources.

Entrepreneurial culture:

Entrepreneurial abilities of the workforce or willingness of workers to take risks. Also refers to management abilities in firms.

● Can lead to innovation = new technology, improving technology and developing business approaches.

● Values of individual responsibility, enterprise, wealth and strong work ethic can assist industrialisation.

Natural resources

Countries with large supply of natural resources like oil, coal and other minerals will naturally have a large mining or oil sector.

● Can boost economic growth because they are highly demanded globally. ● Having extensive reserves if natural resources doesn’t guarantee a country will be

developed or wealthy. ● A large amount of capital is usually needed to develop these resources. A country

may not have the means to exploit these resources.

Institutional factors:

Political and economic institutions:

● Political instability, corruption = undermine confidence of investors ● Flow on effects on activity in economy

Economic policies:

Use regulations and protectionist policies to influence what kinds of products are being made by firms in the country.

● In centrally planned - more gov’t control

● Can use macroeconomic policies (gov’t spending and taxation, interest rates) affect economic activity

● Microeconomic policies can increase efficiency and boost an economy’s productive capacity

● Strategies for growth: ○ Improve natural endowments (CLEN) ○ Improve international competitiveness with macroeconomic policies and

targeting low inflation ○ Improve international competitiveness through microeconomic reforms ○ Increase the country’s access to trade

Government responses to globalisation:

Policies relating to trade, financial flows, investment flows, TNCs and country’s participation will influence its ability to take advantage of integration.

● More open to trade and foreign investment = strong economic growth ● Advantages of integration:

○ Economic restructuring ○ Efficiency ○ Access to foreign capital and technology ○ Access to overseas goods markets

Effects of globalisation: Globalisation has affected a range of economic and quality of life outcomes in individual economies, fundamentally alters the way individual economies and global economy operate, Impact is summarised by international convergence. International convergence: tendency of major economies to adopt similar economic policies and business structures. Economies have come to resemble each other. Strong focus on financial deregulation, floating exchange rates, free trade and inflation targeting. Emphasis has been on reducing government involvement in the market.

Advantages Disadvantages

Increasing globalisation = economic growth and development Now easier for firms and individuals to relocate and adapt to new locations, further increasing global economic integration

Similarities also mean economies encounter the same problems at the same time - a problem is multiplied - can lead to global recession

Financial deregulation is a precondition: ● Financial markets are deregulated when globalisation occurs ● Prerequisite for globalisation

● To take advantage of globalisation - have to be able to move money around freely ● 2007 sub-prime mortgage crisis - people questioned roles and benefits of

deregulation How globalisation affected:

● Emerging economies ○ Benefited greatly ○ Political and economic capabilities to engage with world economy ○ China - improved literacy and HDI

● Advanced economies

○ Main beneficiaries of globalisation and grown strongly ○ Well developed before globalisation ○ Healthy, well educated workforce is necessary to take advantage of

globalisation ○ Australia - life expectancy rose significantly

● Developing economies

○ Situation now is not much better than 20-30 years ago ○ Average life expectancy in Swaziland was 40 in 1970 and 32 in 2009 ○ Sub-Saharan Africa suffers badly from health problems ○ Globalisation has failed to help them - they haven’t been able to engage with

world economy due to political and economic turmoil

● Former communist economies ○ Not developed very well under globalisation - have lacked economic and

political capabilities ○ High levels of instability and corruption - haven’t been able to improve living

standards QUEEN EXITS This (world)

● Quality of life indicators: should improve living standards ○ As economies grow -- more money can be invested in areas such as health ○ Increase in production creates more jobs --- GDP per capita rises ○ Governments may invest in improving various quality of life outcomes as a

strategy to boost growth and take advantage of globalisation ○ As world becomes more politically and economically integrated - pressures

other economies to follow ○ Measured by: GDP per capita, literacy rates, life expectancy, malnutrition

levels

● Unemployment: can lower unemployment ○ Boosting international trade - global production expands = new jobs ○ Domestic industries develop - attract investment - allows them to expand =

new jobs

○ Global competition = increase of structural unemployment in short term - long term = jobs are replaced as more competitive industries develop

● Environment: major criticism of globalisation

○ Rapid growth = more production = pollution and greater use of resources ○ Big problem considering rapid growth of countries ○ International trade - increase in transport - big sources of pollution

● Economic growth: globalisation = higher economic growth

○ Quantitative measure of real economic growth over time ○ Main motivation for globalisation

● External stability: overall trade flows increase

○ International trade risen sharply - protectionist barriers have been reduced ○ Technology has made transport and communication cheaper and easier

● Income and wealth distribution: inequality has increased as result of globalisation

○ Absolute poverty decreased ○ Gap between rich and poor is rising ○ Certain groups benefit more from globalisation than others

● International business cycle: led to emergence of IBC. synchronisation of business

cycles of individual economies ○ Total economic growth of world - variations of GWP

● Inflation:

○ Increased competition = lower market price ○ Consumers have access to cheaper imports, reducing imported inflation

● Trade: changes in direction and composition of trade flows

○ Exports plunged 2008-10 but rose after ○ Rapid increase in value of trade in services ○ Increasing importance of trade blocs and agreements has redirected trade

● Transnational corporations and investment: increased TNCs and investment

○ Financial deregulation - floating exchange rates ○ Information and communication tech has made it easier to move money ○ More investment opportunities = more TNCs

● Growth strategies: governments have reduced their role in the economy

○ Affects policy decisions of government ○ Trend towards rationalist policies ○ Financial deregulation, floating exchange rates, privatisation, removal of trade

barriers

Trade, investment and transnational corporations: ● Globalisation = substantial increase in size of trade flows and foreign investment ● TNCs are becoming more dominant around the world ● Vertical specialisation: how goods are produced in different stages in different

economies ● Increased reliance on foreign investors ● Removal of restrictions on foreign ownership = growth of TNCs ● TNCs are criticised for cheating labour laws

Environmental sustainability: ● Low income countries can deplete resources to attract foreign investment and

increase exports ● Growth in global trade - increase in consumption of non-renewable resources ● Paris conference - 200 countries agreed ● Globalisation has also facilitated transfer of new technologies to improve energy

efficiency

The international business cycle: ● Benefit of integration: allows countries to achieve faster rates of growth by

specialising in certain types of production and trade ● Countries are more exposed to downturns in international business cycle and

developments in their region ● Macroeconomic policies are now coordinated in global crisis

Unequal distribution of income and wealth is one of most worrying effects of globalisation Purchasing Power Parity (PPP): Theory that states that exchange rates should adjust to equalise the price of identical goods and services in different economies around the world

● In short term: ○ Inequality is beneficial to wealthy, advanced economies as their companies

don’t face serious competition ○ Competitive industries cannot develop due to inadequate domestic base of

investment capital ○ Many countries remain dependent on foreign aid

● In long term:

○ Negative consequences from entire world ○ If developing countries become more competitive - lower prices - higher

quality ○ If they become viable producers there will be more efficient allocation of

resources

○ Less inequality is beneficial for entire world growth

Income and quality of life indicators: Quality of life indicators: Qualitative and quantitative measures used to judge the standard of living within countries. Standard of living refers to conditions in health, education and GDP per capita.

● Difficult because so many factors and statistics can affect the standard of living ● Life expectancy, infant mortality, child malnutrition, poverty.

HDI takes into account:

● Life expectancy at birth ● Levels of education attained ● Gross national income per capita

Emerging economies: Are in process of industrialisation or modernisation and experiencing sustained high levels of economic growth.

● Fast growing income countries ● Income levels vary ● Moving from developing countries to advanced economies ● Improving GDP per capita and living standards ● Lower living standards ● BRIC, Malaysia, Philippines, Chile

Advanced economies: Countries that have high levels of economic development, close economic ties with eachother and liberal-democratic political/economic institutions.

● High income countries ● Very high living standards - high HDI and education ● Highly industrialised ● Large manufacturing sector in comparison to agricultural ● Growth in service sector ● North America, Western Europe, Japan, Australia, New Zealand, Korea

Developing economies: Generally have low income levels per capita, human resources and health outcomes. Only experience industrialisation to an extent.

● High levels of income inequality

● Dependence on agriculture ● Reliance on foreign aid for income ● Low levels of labour productivity, industrialisation, technological innovation and

infrastructure development ● Undemocratic - lots of corruption ● Africa, South America, Asia

Capital:

Having access to funds necessary for production.

● May be used for a range of purposes. ● Countries with rich supply of capital = richer and more productive because they can

invest in more efficient technology. ● Capital rich countries specialise in manufacturing = value-added production.

Labour economies:

Refers to workers in a country. Amount of workers and quality of labour supply are important. Can both be improved by government policies:

● Quantity: major role in determining what kind of production economy will specialise in. Government has limited ability to affect quantity of workers, can provide incentive to join labour force.

● Quality: refers to attribute if workers skill, education and qualifications. High income countries tend to have highly educated and skilled labour resources.

Entrepreneurial culture:

Entrepreneurial abilities of the workforce or willingness of workers to take risks. Also refers to management abilities in firms.

● Can lead to innovation = new technology, improving technology and developing business approaches.

● Values of individual responsibility, enterprise, wealth and strong work ethic can assist industrialisation.

Natural resources

Countries with large supply of natural resources like oil, coal and other minerals will naturally have a large mining or oil sector.

● Can boost economic growth because they are highly demanded globally. ● Having extensive reserves of natural resources doesn’t guarantee a country will be

developed or wealthy. ● A large amount of capital is usually needed to develop these resources. A country

may not have the means to exploit these resources.

Institutional factors:

Political and economic institutions:

● Political instability, corruption = undermine confidence of investors ● Flow on effects on activity in economy

Economic policies:

Use regulations and protectionist policies to influence what kinds of products are being made by firms in the country.

● In centrally planned - more gov’t control ● Can use macroeconomic policies (gov’t spending and taxation, interest rates) affect

economic activity ● Microeconomic policies can increase efficiency and boost an economy’s productive

capacity ● Strategies for growth:

○ Improve natural endowments (CLEN) ○ Improve international competitiveness with macroeconomic policies and

targeting low inflation ○ Improve international competitiveness through microeconomic reforms ○ Increase the country’s access to trade

Government responses to globalisation:

Policies relating to trade, financial flows, investment flows, TNCs and country’s participation will influence its ability to take advantage of integration.

● More open to trade and foreign investment = strong economic growth ● Advantages of integration:

○ Economic restructuring ○ Efficiency ○ Access to foreign capital and technology ○ Access to overseas goods markets

Effects of globalisation: Globalisation has affected a range of economic and quality of life outcomes in individual economies, fundamentally alters the way individual economies and global economy operate, Impact is summarised by international convergence. International convergence: tendency of major economies to adopt similar economic policies and business structures. Economies have come to resemble each other. Strong focus on financial deregulation, floating exchange rates, free trade and inflation targeting. Emphasis has been on reducing government involvement in the market.

Advantages Disadvantages

Increasing globalisation = economic growth and development Now easier for firms and individuals to relocate and adapt to new locations, further increasing global economic integration

Similarities also mean economies encounter the same problems at the same time - a problem is multiplied - can lead to global recession

Financial deregulation is a precondition: ● Financial markets are deregulated when globalisation occurs ● Prerequisite for globalisation ● To take advantage of globalisation - have to be able to move money around freely ● 2007 sub-prime mortgage crisis - people questioned roles and benefits of

deregulation How globalisation affected:

● Emerging economies ○ Benefited greatly ○ Political and economic capabilities to engage with world economy ○ China - improved literacy and HDI

● Advanced economies

○ Main beneficiaries of globalisation and grown strongly ○ Well developed before globalisation ○ Healthy, well educated workforce is necessary to take advantage of

globalisation ○ Australia - life expectancy rose significantly

● Developing economies

○ Situation now is not much better than 20-30 years ago ○ Average life expectancy in Swaziland was 40 in 1970 and 32 in 2009 ○ Sub-Saharan Africa suffers badly from health problems ○ Globalisation has failed to help them - they haven’t been able to engage with

world economy due to political and economic turmoil

● Former communist economies ○ Not developed very well under globalisation - have lacked economic and

political capabilities ○ High levels of instability and corruption - haven’t been able to improve living

standards QUEEN EXITS This (world)

● Quality of life indicators: should improve living standards ○ As economies grow -- more money can be invested in areas such as health ○ Increase in production creates more jobs --- GDP per capita rises

○ Governments may invest in improving various quality of life outcomes as a strategy to boost growth and take advantage of globalisation

○ As world becomes more politically and economically integrated - pressures other economies to follow

○ Measured by: GDP per capita, literacy rates, life expectancy, malnutrition levels

● Unemployment: can lower unemployment

○ Boosting international trade - global production expands = new jobs ○ Domestic industries develop - attract investment - allows them to expand =

new jobs ○ Global competition = increase of structural unemployment in short term - long

term = jobs are replaced as more competitive industries develop

● Environment: major criticism of globalisation ○ Rapid growth = more production = pollution and greater use of resources ○ Big problem considering rapid growth of countries ○ International trade - increase in transport - big sources of pollution

● Economic growth: globalisation = higher economic growth

○ Quantitative measure of real economic growth over time ○ Main motivation for globalisation

● External stability: overall trade flows increase

○ International trade risen sharply - protectionist barriers have been reduced ○ Technology has made transport and communication cheaper and easier

● Income and wealth distribution: inequality has increased as result of globalisation

○ Absolute poverty decreased ○ Gap between rich and poor is rising ○ Certain groups benefit more from globalisation than others

● International business cycle: led to emergence of IBC. synchronisation of business

cycles of individual economies ○ Total economic growth of world - variations of GWP

● Inflation:

○ Increased competition = lower market price ○ Consumers have access to cheaper imports, reducing imported inflation

● Trade: changes in direction and composition of trade flows

○ Exports plunged 2008-10 but rose after ○ Rapid increase in value of trade in services ○ Increasing importance of trade blocs and agreements has redirected trade

● Transnational corporations and investment: increased TNCs and investment

○ Financial deregulation - floating exchange rates ○ Information and communication tech has made it easier to move money ○ More investment opportunities = more TNCs

● Growth strategies: governments have reduced their role in the economy

○ Affects policy decisions of government ○ Trend towards rationalist policies ○ Financial deregulation, floating exchange rates, privatisation, removal of trade

barriers

Trade, investment and transnational corporations: ● Globalisation = substantial increase in size of trade flows and foreign investment ● TNCs are becoming more dominant around the world ● Vertical specialisation: how goods are produced in different stages in different

economies ● Increased reliance on foreign investors ● Removal of restrictions on foreign ownership = growth of TNCs ● TNCs are criticised for cheating labour laws

Environmental sustainability: ● Low income countries can deplete resources to attract foreign investment and

increase exports ● Growth in global trade - increase in consumption of non-renewable resources ● Paris conference - 200 countries agreed ● Globalisation has also facilitated transfer of new technologies to improve energy

efficiency

The international business cycle: ● Benefit of integration: allows countries to achieve faster rates of growth by

specialising in certain types of production and trade ● Countries are more exposed to downturns in international business cycle and

developments in their region ● Macroeconomic policies are now coordinated in global crisis