TOPIC ONE - THE GLOBAL ECONOMY NOTES.docx

**[HSC TOPIC ONE -- THE GLOBAL ECONOMY]** INTERNATIONAL ECONOMIC INTEGRATION The global economy is where individual economies are increasingly linked to each other, and changes in one economy can have effects on others. Globalisation is the integration of economies and the increased impact of int...

**[HSC TOPIC ONE -- THE GLOBAL ECONOMY]** INTERNATIONAL ECONOMIC INTEGRATION The global economy is where individual economies are increasingly linked to each other, and changes in one economy can have effects on others. Globalisation is the integration of economies and the increased impact of international influences on all aspects of life and economic activity. - Increased levels of integration was seen in the aftermath of WWI and WWII where the development of technologies were increasingly prevalent and travelling occurred. Gross World Product refers to the sum of total output of goods and services by all economies in the world over a period of time. (The global economy produces GDP that can go up and down GWP is one movement; where the GDP of all economies are averaged out to see the fluctuations of the world.) Indicators of globalization International Trade in Goods and Services - This indicator is a measure of how goods and services produced in an economy are consumed in other economies around the world. Stats - Since the GFC, the World GDP and GDP have had similar trends. Eg. in 2020, individual countries backed out of trade faster (to save the economic condition of their country, decreasing growth) than the GWP's decrease in growth. = high volatility - 1990: US\$4.3 trillion; 19% went to other countries. 2020: US\$22.6 trillion; 26% went to other countries. This reflects the specialization to trade. Increased trade flows are due to: - Due to new technology in transport and communications, global trade increased as it reduced the cost of moving goods between economies and provided easier communication/services to overseas customers. - The removal of trade barriers and the establishment of trade organisations that encourage trading, cause countries to trade goods and services. The composition of global trade is what makes up trade and overtime, what is traded has changed. - Manufacturing has dominated global trade in both 1995 and 2022 but has decreased. - Commercial services have increased by 3% due to advancements in technology that have allowed for services to occur online rather than in person. - Fuels and minerals have increased by 3% due to population increases which have increased the production of goods and services and consumption of these products. The direction of global trade is what countries are doing the trading/exporting - Other countries have grown relative to high-income countries. The biggest increase is from East Asia and the Pacific from 6%-20% due to its rapid industrialization in recent years. International Financial Flows - This indicator is a measure of how money moves between countries. - Finance is the shorter-term speculative shifts of money. Reasons for increase in financial flows - In the 1970-80s, most countries underwent financial deregulation which aided in expanding international financial flows. - Controls on foreign currency markets, flows of foreign capital, banking interest rates and overseas investments in share markets were lifted. - New technology allowed finance to move quickly from one country to another. Impact of speculators - Speculators are investors who buy or sell financial assets to make profits or minimize risk from short-term price movements and are criticized for creating excessive volatility in financial markets which is not good. - Speculators and currency traders are the main drivers of international financial flows (shift billions in and out) and only a small share of what they do is for real economic purposes. - Foreign exchange markets are networks of buyers and sellers exchanging one currency for another to facilitate money moving between countries. Benefit of greater financial flows: - Obtaining increasing financial flows internationally allows countries to have funds to use for domestic investment, specifically low national saving countries who didn't have the money before for large investment projects to develop their economies. Investment and Transnational Corporations - This indicator is a measure of the rapid investment growth between countries. - Investment is the longer-term flow of money to buy or establish businesses. - Foreign Direct Investment (FDI) is a measure of the globalization of investment, that shows the movement of funds between economies that directly invest in establishing a new company or buying a large proportion of shares in an existing company (10%). Accounts for \ Europe and the US. 164 million people are migrant workers (2%) - Advanced economies are in demand for low-skilled labour, which is filled by low-income migrants. - Brain drain: educated workers leaving one country. Brain gain: educated workers coming into a country. - The international division of labour is where tasks in the production process are done by people in different countries around the world for specialization and cost. - However, there are barriers to the movement of labour including inadequate skills, language, immigration restrictions and cultural factors. - The international division of labour also includes the movement of businesses, where businesses choose to produce with the most efficient and cost-effective labour and with multiple facilities worldwide to reduce costs (offshoring). The international and regional business cycles The international business cycle refers to the change in output over time and the fluctuations in this cycle are caused by changes in the total level of output and supply of the world. There is synchronization between individual economies and internationally during global recessions where impacts were less severe than in other countries. GDP generally increases over time, but unforeseen circumstances can cause recessions such as natural disasters, war, crashes in the share market and domestic factors; political instability and interest rates. GDP has a proportional relationship with GWP. Factors that strengthen the international business cycle Trade flows: if there is a boom or recession in one country, this will affect the demand for goods and services from other nations. There are significant flow on effects between trade partners. Investment flows: economic conditions in one country will affect whether businesses in that country will invest in new operations in other countries, affecting their economic growth. Transnational corporations: they are the reason for the spread of global upturns and downturns throughout the global economy. Transnational corporations are global companies that dominate global product and factor markets. The TNCs have production facilities in at least two countries and are owned by residents of at least two countries. Financial flows: short-term financial flows play an important role in transmitting the international business cycle because they create fluctuations. Financial market and confidence: an investor's consumer confidence is influenced by the economic conditions of other countries because the share prices of the world's major stock exchanges are strongly correlated. This means that events that threaten global stability can have significant effects on share values. Global interest rate levels: interest rate changes in other countries significantly influence monetary policy conditions in individual economies. High economic growth = high interest rates -\> flow on to other countries. Commodity prices: commodity (raw materials; energy, minerals, and agricultural products). The prices of commodities are set by global markets, so its prices can influence inflation, investment, employment, and growth internationally. International organisations: international forums influence global economic activity through discussions of global economic conditions to improve it. This can include coordinating global macroeconomic policy during periods of downturn. Factors that weaken the international business cycle Interest rates: higher interest rates will dampen economic activity while lower interest rates will stimulate economic activity. Exchange rates: the rates differ between each country and can impact the level of trade competitiveness and confidence within countries. Structural factors: how the economy is set up will influence the competitiveness of economies and their level of growth. Regional factors: some economies are closely integrated with their neighbours so they are influenced by the economic performance of their trading partners. Regional Business Cycles refer to the changes in output over time in a geographical region. Increased integration causes greater flow-on effects when something happens to one country. TRADE, FINANCIAL FLOWS AND FOREIGN INVESTMENT Advantages and Disadvantages of Free Trade Trade plays a vital role in the expansion of the global economy, as a way to access a larger consumer base and obtain exports from other countries for other means of production. - Free trade is a situation where governments don't implement artificial barriers to trade. - Comparative advantage is the idea that nations should specialize in areas of production where they can obtain the lowest opportunity cost and trade with other nations to maximise each other's standard of living. - Opportunity cost is the cost of satisfying one want over an alternative want. - Absolute advantage: who can produce the most of a good with their resources Advantages of Free Trade - Trade allows countries to [obtain goods and services that they cannot produce themselves] (they produce insufficient quantities to satisfy domestic demand because of the lack of adequate resources). - Free trade allows countries to [specialize] in the production of the goods and services in which they are most efficient because they have to compete with foreign firms who are more efficient and have lower prices. This results in domestic firms allocating their resources more efficiently which increases their production and [international competitiveness]. - Free trade encourages businesses to produce goods in which they have a comparative advantage which leads the economy (and the business) to efficiently allocate their resources - Specialisation results in economies of scale, where increased production will lower the cost per unit produced, increasing efficiency and productivity. - Free trade encourages innovation because businesses become more competitive and generate different ways of producing goods efficiently. - Free trade leads to higher living standards because the lower prices established by businesses through international competitiveness allow consumers to buy more for less. Free trade allows for access to new goods not domestically produced, increasing consumer choice, and hence improving living standards (the goods can help improve people's lives). These activities result in higher rates of economic growth and increased real incomes. Disadvantages of Free Trade - Free trade can result in an increase in unemployment as domestic businesses cannot compete with foreign firms. This results in the domestic economy to reallocate its resources to more efficient areas of production where it has a comparative advantage, however the workers become unemployed. - Free trade allows large foreign competitors to enter domestic markets which prevents/makes it hard for new domestic industries to establish if not protected by the domestic economy. - Seasonal production surplus from countries may be dumped to other economies for extremely cheap prices, which causes the domestic industries to discontinue in the long-term. - Free trade encourages environmentally irresponsible production methods as businesses focus heavily on maximizing profits they use production methods that can negatively damage the environment. Role of International Organisations [(ROLE)]The International Organisations are the major institutions in the global economy that work to: - Manage stability of Global Financial Markets - Provide assistance to countries in economic crises. - Develop global standards for environmental protection and management of resources. - Establishing global rules for World Trade and resolution of trade disputes. Before the WTO, the General Agreement on Tariffs and Trade (GATT) existed, which worked on trade negotiations but didn't enforce them. World Trade Organisation \[WTO\] (1^st^ one to with the power to enforce trade agreements across the world; est 1995) - The role of the WTO is to implement, negotiate and improve global trade agreements and to resolve trade disputes between economies. - These trade agreements encompassed trade in goods, services and intellectual property. - Conducts a dispute resolution if no agreement can be reached directly, which involves a WTO panel hearing the complaint and issuing a decision. (eg. Australia & China dispute with the wine) - When the decision is issued and either country involved doesn't follow the WTO's directive, the other country(s) can impose penalties such as high tariffs on imported goods from the offending nation. - WTO's actions in resolving disputes are effective between smaller countries but less effective between the largest forces (US and EU), because they have been delaying and presented appeals rather than accepting WTO's decisions. - WTO has halved average tariff rates, such as in 2014 when they bound the Trade Facilitation Agreement. - Due to protectionism, the WTO's role has weakened where the appeals body cannot enforce WTO rules and instead nations can only resolve their disputes through informal arbitration (third party). The Doha Round is a trade negotiation aimed at reducing agricultural protection, lowering tariffs on manufactured goods and reducing global restrictions on trade in services, in return creating annual welfare gain of US\$90-200 billion per year and lifting over 140 million people out of poverty. However, it has failed due to the declining support for free trade in many countries. By reducing global protection, it specifically aided poorer economies who found it hard to develop a stable trade flow with their goods and services due to the restrictive trade barriers by advanced economies. However, progress has been slow as advanced economies are reluctant to reduce protection due to agriculture and pharmaceuticals protection that benefit their own economy. This makes the WTO's role not as effective because of it has been limited by advanced economies. International Monetary Fund (IMF) - The role of the IMF is to maintain international financial stability regarding foreign exchange markets. The IMF works to minimize financial crises. - Their role was highlighted in 2020 when they provided one-off payments and interest-free loans to help developing and emerging economies design policy responses to COVID-19. - Furthermore, they provided a \$650 billion emergency aid fund to assist developing economies in obtaining vaccines and paying off debt incurred during the pandemic. - During the GFC, the IMF provided US\$520 billion in the global economy to provide focused financial assistance to struggling economies. - The IMF aims to support the free trade of goods and services and the movement of finance by requiring countries to change their economic policies (balancing government budgets) before receiving assistance. - However, they have attracted criticism when the policies they make governments adopt have made economies worse off. - After the Asian financial crisis in the late 1990s, they supported expansionary macroeconomic policies and gave countries more freedom to spend to avoid recession during the GFC. World Bank - It is due to the lack of investment inflows that developing economies have poor economic development, which is why they rely on foreign funds for building infrastructure. - The role of the World Bank is to help poorer countries with their economic development. - To fund investment in infrastructure, reduce extreme poverty and help adjust to increasing globalization. - The World Bank's goals are to reduce the rate of extreme poverty to less than 3% of the world's population by 2030, mostly experiencing poverty due to short-term natural disasters. The other goal is to reduce inequality by fostering income growth for the world's bottom 40%. - This was done by funding over 100 lower-income countries with vaccines, better health systems and increase GDP through funding from member countries. - The World Bank also works to globally transition to renewable energy, allocating 35% of investments towards this cause. - It has also worked to achieve debt relief in 37 countries in 2023. - The World Bank's importance as a financial lender to developing countries has declined due to the prevalence of private lending markets recently. Opposing these international organizations is China, who has become the world's largest overseas development lender, an initiative called the Belt and Road Initiative (BRI), established in 2013. They have provided US\$1 trillion in support to 147 countries and each of their projects has increased economic growth by 0.95 percentage points after two years. Furthermore, its infrastructure projects have reduced economic inequality by 10 percentage points. United Nations est. 1945 - The UN is a global organization that covers the global economy, international security, the environment, poverty, international law and global health issues to help resolve them. However, they have limited decision making and budgets to make this happen. - The role of the UN is to support greater linkages between economies, establishing international standards to make trade and investment flows easier between countries including food safety and rules on intellectual property. - The UN oversees the development of international agreements to enforce human rights and political freedoms, which can lead to economic growth and development. - The UN aids global economic development by boosting quality of life indicators. They have established the Sustainable Development Goals (SDG;17) which aim to reduce global poverty and inequality between 2015-2030 by setting targets along the way to mark progress. Organisation for Economic Cooperation and Development (OECD) - The OECD is an international economic organization of 38 mostly advanced economies that are open to free trade and democracy. - The OECD's main goal is to achieve the highest sustainable economic growth and better standards of living in these 38 countries while maintaining stability in government policies and contributing to the development of the world. - The role of the OECD is to conduct and publish research on economic policy issues and coordinate economic cooperation to develop common policies. - This research relates to advanced economies about their education, employment, health, industry, innovation, migration, regulation, tax and competition. - The coordination challenges inequality vs economic growth that countries should think about a balance of both as inequality has restricted economic growth. - Another role is they participated in reforming corporate taxation rules, agreeing to pay a minimum rate of 15% and making sure companies pay tax. Influence of Government Economic Forums Government economic forums play an important role in coordinating policies between major economies during times of economic or financial crisis but can't enforce anything. It is aimed to discuss these issues to foster economic stability and growth with world leaders. Group of Seven Nations (G7) est.1976; the largest industrialised and wealthiest nations - US, UK, France, Germany, Canada, Japan and Italy. 10% of world's population - They come together to discuss the state of the global economy and also unofficially coordinating global macroeconomic policy because they have so much power. This power allows them to discuss political issues and priorities including climate change, global poverty and security. - Critics have said the G7 isn't representative of the most important forces because they believe China and India are more important than Canada and Italy. Furthermore, the G7's share of global GDP has shrunk from 68% in 1992 to 43% in 2023. - In response to the Russian-Ukraine War, the 2023 G7 summit in Hiroshima Japan provided a forum to provide aid for Ukraine through military assistance packages. Group of Twenty Nations (G20) est.1999; world's largest national economies - making up 85% of GWP and 65% of the world's population - During the GFC, the G20 coordinated fund allocation around the world and supervised international financial institutions. Since then, their cooperation has weakened, they are only holding annual summits to solve current issues. - During the COVID-19 pandemic, the G20 partnered with OECD to establish a minimum global corporate tax rate of 15% and reducing debt relief for developing countries with the IMF and World Bank. Trading Blocs, Monetary Unions and Free Trade Agreements Increased integration between economies has caused countries to create agreements with each other to expand their trade opportunities and avoid being excluded from trading blocs. - A trading bloc (preferential trade agreement) is when groups of countries join together formally to freely trade between themselves but have an external tariff to the rest of the world. - A monetary union is when countries use a common currency and coordinate monetary policy through this central bank. Eg. EU -\> Euro -\> ECB (European Central Bank) - Trade agreements (preferential trade agreements) are formal agreements between countries designed to remove trade barriers between nations. It is a way to increase GWP. - However, trade agreements can result in trade diversion where a country's imports of a good or service switch from the most efficient producer to a regional but less efficient producer. - Different regions vary the extent to which they trade, for example, 60% of exports by EU countries go to other EU countries while ¾ of exports for ASEAN economies go to countries outside their region. However, economies tend to trade within their geographical region. - Trade increases faster and more efficiently between countries with trade agreements. Bilateral Agreements Advantages - Easier and faster to negotiate with only one country - More flexibility - Reduce barriers to trade. Disadvantages - Creates a trade diversion than creation. - Increased cost - Occurs between developed economies, making it unfair to developing economies. Closer Economic Relations Trade Agreement (CERTA) est. 1983; Australia and New Zealand - New Zealand removed export incentives and quotas, Australia decreased protection in the dairy industry. -\> prohibition of all all tariffs and export restrictions as well as business regulations and tax laws. This has caused an annual increase in trade of 7%. - Australia and New Zealand have synchorised their business and tax law, creating a more stable environment that attracts investors for investment. - Multilateral agreements have been unpopular because they block new trading opportunities - Bilateral agreements have been idealized as establishing large increases in trade is expensive as costs to establish and implement have been underestimated. It can also create trade diversion. Multilateral Trade Agreements Advantages - Cost effective. - Developing countries are included. - Comparative advantage doesn't affect previously traded goods. - Increases level of trade. Disadvantages - Slow progress when registering with the WTO. - Difficult to negotiate and agree upon with multiple countries. The Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CP-TPP/TPP-11) est. March 2018 - Australia, Brunei, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore and Vietnam. - 14% economic output, 15% of global trade, 6% of population and 22% of all Australian trade - Lowered 18K tariffs= 98% of all tariffs between these countries. - However, it allows firms the right to sue governments for policy decisions that can harm their investments. Regional Comprehensive Economic Partnership (RCEP); world's largest multilateral trade agreement - Aims to remove 91% of tariffs and it is hoped to boost intraregional trade by 2% - China, Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, Cambodia, Japan, South Korea, Australia, and New Zealand. 15. Est. 2022 - Accounts for ¼ of global trade, 30% of population and GWP - Increases opportunities for Australian businesses and consumers from regional production. Asia-Pacific Economic Cooperation (APEC) est. early 1990s. 21 countries - Created in response to the formation of trading blocs in the EU and NAFTA (didn't want to be excluded). - Australia, Brunei, Canada, Chile, China, Hong Kong, Indonesia, Japan, Malaysia, Mexico, New Zealand, Papua New Guinea, Peru, the Philippines, Russia, Singapore, South Korea, Taiwan, Thailand, US and Vietnam. - 40% of population, over 60% of GWP - APEC has made progress on trade liberalisation when reducing average tariff rates from 10.2% in 1999 to 5.2% in 2020. - They also hold annual meetings to discuss geopolitical (political power geographically) priorities that have helped develop the CP-TPP. - Differently to other trade agreements, APEC has adopted non-discriminatory agreements to trade in the same way with countries in the agreement and not in the agreement. Association of South-East Asian Nations (ASEAN) est. 1967; emerging and developing economies - Most effective within the Asia Pacific region - Indonesia, Malaysia, the Philippines, Singapore, Thailand, Brunei, Vietnam, Laos, Myanmar, and Cambodia - 690 million people, \$4.5 trillion in GDP (5% of global economy) - The ASEAN-Australia-New Zealand Free Trade Area (AANZFTA) est. 2010, working to lowering and eliminating tariffs on 96% of Australian exports. Pacific Agreement on Closer Economic Relations Plus (PACER Plus); pacific island countries - Australia, Cook Islands, Kiribati, Nauru, New Zealand, Niue, Samoa, Solomon Islands, Tonga, Tuvalu, and Vanuatu. - 32 million people, \$2.1 trillion in GDP. - Focuses on economic development by implementing foreign aid programs from AUS and NZ to help with agricultural development, financial stability, and trade infrastructure. The European Union (EU) est. 1950s; most important trade bloc - 450 million people, 15% of world trade, 17% of GWP - The EU has applied high rates of protection to agricultural products, subsidizing their firms by utilizing 1/3 of their budget to fund. This disadvantages economies outside this trade bloc as they have to find other export markets. - 20 countries within the EU participate in a monetary union (eurozone), a common currency with common interest rates that has increased integration between these countries but has halved their share of world output. - Since the European sovereign debt crisis in 2011, richer economies in the EU have to support poorer economies by paying off their debt, disadvantaging their economic growth by decreasing trade flow amongst this agreement. North American Free Trade Agreement (NAFTA) or USMCA - US, Mexico, Canada - Addresses issues such as digital trade, corruption and intellectual property The African Continental Free-Trade Area (AfCFTA) - 55 countries, 1.3 billion people, US\$3.4 trillion in GDP - Aims to eliminate 90% of tariffs between countries, hoping to boost the economies by 7% by 2035, helping 30 million people out of extreme poverty and lifting GDP by \$450 billion. PROTECTION Protection refers to government policies that give domestic producers an artificial advantage over foreign competitors. Eg. tariffs, quotas, and subsidies. Economic Reasons for Protection Infant Industries - New industries face difficulty so governments decide to implement policies to shield them from foreign competitors so that they can grow, establish markets and achieve economies of scale without pressure from foreign competitors before competing in the global economy. - However, at some point, the protection must be removed or there will be no incentive for the industry to reach an efficient level to compete without protection. This protection should only be given to industries that have a good chance of achieving a comparative advantage long-term as some industries have been supported but can't survive long-term. Prevention of Dumping - Dumping is the practice of exporting goods to a country at a lower price than their selling price. It occurs to dispose of large production surpluses or to establish a market position in another country. - However, these low prices and surpluses are only temporary, which significantly harms domestic producers long-term as they are forced out of business due to consumers buying from the foreign country. So, when the low price and surplus are gone, there is no one to provide the goods anymore, creating a loss in productivity and higher unemployment. It is in this situation that protection policies are implemented. - Recently, the WTO has questioned whether countries are unfairly accusing efficient low-cost foreign producers of dumping. Protection of domestic employment - When local producers are protected from competition that has cheaper foreign imports, the demand for local goods will increase, creating more domestic employment. This argument is used during times of recession. - Protection will distort the allocation of resources from more to less efficient production, which long-term creates higher levels of unemployment and lower growth rates. By not jumping to protection immediately, more long-lasting internationally competitive jobs are created. Differentials in wage levels - Due to differences in wage levels between high and low-income economies, domestic producers should be protected from competition that uses low-cost labour as the cost of the goods produced is generally lower, which is more favourable to consumers. Non-economic Reasons for Protection Defence and national security - Countries prefer to have their own defence industries so that if threatened, can produce equipment needed for national security. Modern slavery - Due to the growing awareness of modern slavery, many countries have prohibited the trade of goods produced using forced labour because it encourages the abuse of human rights. Environmental Factors - Different economies have varying levels of environmental standards required to produce goods so some economies conduct practices to minimize harm to the environment while others can significantly harm the environment. Therefore, many countries have implemented a carbon tariff on goods produced by countries that have slower progress on reducing carbon emissions. Methods of Protection Tariffs - A tariff is a government-imposed tax on imported goods. Economic effects: - By implementing a tariff, the price of imported goods is raised, making the domestic producer more competitive. This allows domestic producers to increase the quantity of goods supplied, stimulating domestic production and employment = increasing GDP. - The tariff increases the revenue for the government, money that is used to fund infrastructure, increasing economic development for the country. However the less revenue obtained the more successful the tariff as imports are restricted. - A tariff can create a retaliation, where a trading partner implements a trade barrier against a country that imposed a tariff on its exports. Without tariff: at world price - Domestic producers are worse off as most consumers will choose to buy at a cheaper price. - Consumers benefit because there are more goods and are sold at lower prices. - Overseas countries exporting benefitted because most of the population is buying from them. With tariff - Domestic producers are better off as they can produce more quantity to satisfy consumer demand at a better price. - Consumers are worse off as there are fewer goods from overseas and prices are higher. - Overseas countries exporting are worse off because they pay more to get their goods into overseas markets but don't receive the price they pay it's the price minus the tariff. Large tariff = large tax on imports (more protection). Large quota = more imports allowed in (less protection). Quota - A quota is a government-imposed restriction on the quantity of goods imported. Economic effects: - The price adjusts based on the quantity. - By implementing a quota, domestic producers are guaranteed a share of the market, so they become more competitive. This allows domestic producers to increase the quantity of goods supplied, stimulating domestic production and employment = increasing GDP. - Consumers are worse off as there are fewer goods from overseas and prices are higher. - Overseas countries exporting benefit more than tariffs but are still worse off because they pay more to get their goods into overseas markets but receive the price they pay. - No government revenue is generated. - A quota can create retaliation, where the initial quota-imposed country can have the quantity of their exports reduced.  Subsidies - Subsidies are government cash payments to domestic businesses to increase their competitiveness and encourage the production of a good or service. Economic effects: - By providing subsidies to businesses, they have the financial funds to reduce their selling price and compete with foreign producers. This allows them to **increase the quantity of goods supplied,** (increases supply in the graph)stimulating domestic production and employment = increasing GDP. It doesn't restrict imports or raise their prices. - Consumers benefit as there are more goods at a lower price, however, they do pay for the subsidies indirectly through higher taxes during that time. - Subsidies are a direct cost of the government's budget causing the government to have fewer resources to allocate to other areas such as education and healthcare. A graph of a function Description automatically generated with medium confidence Local Content Rules - Local content rules refer to rules set by the government that specify that a percentage of goods sold to consumers must be locally produced to prevent a tariff from being implemented. - It provides an incentive for domestic producers to produce more, creating job opportunities that can increase income and improve an individual's living standards. - It creates a more self-reliant economy and preserves cultural traditions. - But, it can increase production costs because it limits access to innovative and efficient technology, lowering efficiency while increasing the price for consumers. - It also places heavy reliance on local suppliers, increasing the chance of risk. Export Incentives - Export incentives refer to the programs implemented by the government that provide domestic producers assistance, so they can penetrate global markets or expand their market share. Eg. grants, loans or technical assistance. - It encourages businesses to invest in technology, r&d, efficiency, and competitiveness, providing more job opportunities and increased GDP. - However, firms can become too over-reliant and cannot survive without it. Globalisation and Economic Development Indicator: something to measure something There has been a large difference in the living standards of people around the world seen through: - An estimated 685 million people live in "extreme poverty", living on less than US\$2.15 per day in 2022. - Over 1.7 billion people live without access to basic sanitation. - Around 750 million people have no access to electricity. but there has been action to overcome these global inequalities: - In 1981, 43.6% of people were living in extreme poverty, where they lived on only \$US2.15 per day but it has declined significantly to 9% in 2019. - Life expectancy for people born in low human development countries has increased from 50 to 61 years between 1990 and 2021. Differences in income and economic growth Economic growth A country can achieve economic growth by increasing their use of resources through new technology and increasing the productivity of existing resources by increasing labour and capital productivity. Differences in economic growth Income is a way to compare living standards between economies. It measures the ability of a nation's citizens to satisfy their material wants. Gross National Income (GNI) is a measure of the total economic output produced by an economy's citizens, including the income generated in the economy and income earned overseas. It reflects an economy's overall economic health and performance. - Figure 3.1 stats: The US and China have the largest GNI. Purchasing Power Parity (PPP) states that exchange rates should adjust to equalize the price of identical goods and services in different economies around the world. - Measuring against PPP in economies around the world rather than against US dollar reflects the economy's purchasing power, providing a standard comparison of real income levels between countries. - Furthermore, PPP can be used to adjust GNI per capita figures to account for differences in price levels between countries, reflecting their true standards of living. This is because countries with the same level of GDP but with varying population can have different qualities of life as the money has to be shared with everyone, PPP is used to show this. - GNI per capita = Real GNI/population of economy Global wealth - Globally, there is an unequal distribution of global wealth. Figure 3.2 Stats: - High-income (advanced) economies receive around 2/3 of the world's income, showing how inequality clearly exists in the global economy. Figure 3.3 Stats: - People in high-income regions enjoy income levels nearly five times those in low-middle-income countries after PPP. - 40% of the world's population lives in Sub-Saharan Africa and South Asia where living standards are exceptionally low. - The actions to close the gap regarding income inequality is occurring slowly. Figure 3.4 Stats: Global Distribution of Wealth - Income is used to generate wealth and allows people with wealth but no income to still survive. - According to a 2022 report by Credit Suisse, the top 1% of the 8 billion people of the wealthy to poor people owned 46% of global wealth, while the bottom 50% of the 8 billion of the wealthy to poor people owned less than 1%. - Over 90% of the world's \$US463 trillion in wealth is held by individuals in Europe (23%), North America (34%), China (18%), Japan and Australia. - People in Latin America (3%), India (3%), and Africa (1.3%) hold a small percentage of global wealth. - This shows the unequal distributions of wealth globally. Distribution of Income and Wealth - Income refers to a person's earning from contributing to production and can be seen in the forms of wages, rent, interest or profit from investments. - Wealth refers to a person's net value of assets. - Income is used to generate wealth View on Globalisation - Globalisation was meant to bring the world together but due to the benefits not equally shared within and among countries, many were annoyed. - Emerging economies were devastated by the international investor's volatility and the changing capital flows (movement of money for investment, trade or business operations) Describe the difference between economic growth and economic development. Economic growth is the increase in the overall value of goods and services produced by a given economy measured in the percentage rate of increase in real (adjusted to account for the effects of inflation) GDP. However, economic development refers to a country's wellbeing, measured using trends in sustainability, quality of life and the human development index (HDI) which assess education and life expectancy. Economic Development Economic development refers to the process of structural change needed in an economy for economic growth to occur. This process includes developing an economy's economic and social infrastructure to obtain a better life for all. - It measures improvements in wellbeing rather than how much extra money people have. - Higher incomes help people improve their wellbeing. - A major process that many economies went through was from a rural-based agricultural society to an industrial and service-based economy. This process led to significant structural changes in employment. Differences in Economic Development Economic development measures improvements in wellbeing and is measured by the Human Development Index, developed by the UNDP. - Life expectancy at birth: indicates the economy's health and nutrition standards to reduce infant mortality and improve its economic wellbeing - Pollution and sanitation affects life expectancy at birth - Levels of educational attainment: education increases people's skills and their performance in the workforce, allowing for future development potential. - The HDI here measures the average number of years for which adult aged 25 attended school and the expected years of total school attendance for school-aged children. - Low level of education attainment usually means a low level paid work - National Income per capita: measures the total economic output produced by an economy's citizens, including the income generated in the economy and income earned overseas. This is used to measure the standard of living expected by all citizens as it is the money individuals will receive if national income were split evenly amongst the population. HDI trends - The global HDI declined during 2020 and 2021, reflecting the reduction of life expectancy due to COVID-19, erasing the gains of the previous 5 years. High HDI - Switzerland: 0.962, GNI per capita: 66,933 - Mexico: 0.758, GNI per capita: 17,896 - Cuba: 0.764, GNI per capita: 7879 - The above shows that while Mexico has a significantly higher GNI per capita, it ranks lower in its HDI value than Cuba. Mexico has a GNI per capita of 17,896 while Cuba has a GNI per capita of 7879. It shows that the benefits of income are not well distributed as a result of their high levels of inequality. Low HDI - South Sudan: 0.385, GNI per capita: 768 The Global Goals: Sustainable Development Goals (SDGs) began in September 2015, promoting 15-year targets aimed at tackling poverty with a renewed focus on sustainability issues. 6\. Ensure availability and sustainable management of water and sanitation for all. In 2022, billions of people around the world still lack access of safe drinking water, sanitation and hygiene. - In 2020, 2.4 billion people live in water-stressed countries. - 2.2 billion people lack safely managed drinking water. - 3.5 billion people lack safely managed sanitation. - 2.2 billion people lack basic hand washing facilities. Targets - 6.3: improve water quality by reducing pollution, eliminating dumping, and minimizing the release of hazardous chemicals and materials. This can be used to halve the proportion of untreated wastewater so that there is quality water safe to drink and increase recycling. - 6a: expand international cooperation and increased capacity-building support to increase independence in regard to water by developing sanitation-related activities such as water harvesting and wastewater treatment. Progress - 6.3: In 2022, an estimated 58% of the wastewater generated by households was safely treated, meaning there has been progress made to half the proportion of unsafe water. - 6a: Official Development Assistance (ODA) is government aid that promotes the economic development and welfare of developing countries. Between 2015 and 2021, their disbursements to the water sector have decreased by 15%, from \$9.1 billion to \$7.8 billion. Water is an essential part of a person's survival and unsafe, bacterial-infected water can cause infections and diseases if left untreated. This can lead to reduced life expectancy and decrease the person's overall quality of life. The actions to establish washing facilities, treat unsafe water, and create access to safe drinking water have improved the well-being and health of many people. This allows people to live a longer life and increase their standard of living. At the halfway point, the UN Independent Group of Scientists reported that the world was not on track to meet the SDGs while the UNCTAD dedicated funds to achieve these goals. - COVID-19 saw a further 80 million people live in extreme poverty and 100 million children fall below minimum reading proficiency levels. - Recent violent conflicts including the Russian invasion and the continuing Israeli-Palestinian conflict has caused food and refugee crises. - Rising interest rates has caused many highly indebted developing nations to reduce their spending on programs that address the SDGs. Categories of Development in the Global Economy Advanced Economies - High level of economic development: what is their HDI? - Close economic ties with each other: do they have close ties with other advanced economies? Because if they are working together they can benefit from each other. - Liberal-democratic political/economic institutions: Do they have elections? Do the people have a say? Secure economic institution such as secure banks that function? Are they free from corruption? - GNI per capita: above \$US13,205. Don't necessarily have the be up there - Mostly in North America and Western Europe - Slower growth in recent decades, an average of 1.8% - Identified by the International Monetary Fund (IMF), 41 advanced economies make up most of the high-income economies in the world. - Structure of the economy is service-based with advanced automated manufacturing. Developing Economies - Low income levels and HDIs - Weak human resources: low-skilled and/or unhealthy. Quality of labour; literacy skills, physically able. - Limited industrialisation has occurred. Industrialisation is key to going from developing to advanced. - Large numbers of people living in absolute poverty (less than \$US2.15/day 2017, PPP) - Divided into two groups: lower-income and middle-income - High levels of income inequality: government has a weak structure and doesn't redistribute income as well as advanced economies. Agriculture is low paid so there isn't enough money to inject into the economy to develop the country. - Highly dependent on agricultural production for income, employment, and trade. Not highly valuable goods sold - Relies on foreign aid - Low levels of labour productivity: low levels of educational attainment, use of capital, industrialisation can improve productivity levels. - Weak political and economic institutions with a high prevalance of corruption Developing economies experience low living standards, education levels, and generally have agriculture-based economies with poor infrastructure and economic and political institutions. Stats: In a collection of data from the World bank regarding the proportion of people in absolute poverty globally, rapid and significant reductions in poverty have occurred in all regions except Africa. Emerging Economies Emerging economies are in the process of industrialization (heavy manufacturing presence) where they are experiencing sustained high levels of economic growth of approximately 5-10%. They have varying income levels as they are constantly changing but are generally low, however they are growing. Emerging economies are popular with investors because of high growth and profits which increases investment returns. They include Malaysia, the Philippines, China, Hungary, India and Indonesia. Classifications are limited to the fact that they are extremely broad and can group completely different economies together. Eg. Brazil and Indonesia are considered emerging economies but have completely different living standards. Advanced Economy: Australia - GNI per capita: \$US60,350 - GDP Economic Growth: 3.37% from 1960 to 2023 - Structure of the economy: service-based economy, accounting for 80% of Australia's domestic production. Developing Economy: Myanmar - GNI per capita: \$US1,210 - Economic Growth: In 2022, 2.0% - Structure of the economy: agriculture employs 70% of the labour force, service sector is 33% Emerging Economy: Brazil - Average annual salary: \$US8,410 - Economic Growth: In 2021, 5% - Structure of the economy: strong and rapidly growing service sector (69.38% of the population) but also has a huge mining, agriculture and manufacturing sector (20.63% of the population) Causes of inequality in the Global Economy: Reasons for the differences Global Factors Global Trade System - Wealthy countries protect their domestic agricultural sector because it isn't as competitive as the ones in developing nations. This causes developing countries to be limited in exporting agricultural products such as commodities, causing greater inequality between economies. - However, regional trading blocs such as the EU and United States-Mexico-Canada Agreement (USMCA) excludes poorer nations from gaining access to profitable global consumer markets. This increases the difference in economic development among nations. - The benefits of free trade agreements such as creating appeals against other countries' protectionist measures aren't accessible to developing nations as they are expensive to implement. Global Financial Architecture - Deregulating global financial markets aimed to create development opportunities but have created global inequalities. - Long-term international flows of investment favoured developed countries which resulted in developing economies lacking funds used to increase economic growth and development. - Short-term financial inflows favour emerging economies that are doing well, as market speculators received better financial returns. - However, these economies are exposed to economic volatility, seen in the financial crisis of East Asia in late 1990s which set back economic development for years. - Low-income countries with stronger banking sectors were able to better manage volatility - The IMF (the international organization that oversees the global financial system) was not treating all economies equally as their "structural adjustment" policies served the interests of high-income countries rather than developing economies. - Many developing countries have large foreign debt burdens which result in individuals to spend more of their income toward paying off past loans. This reduces their income available for governments to use to contribute toward economic development. Global Aid and Assistance - The small-scale efforts made by developed countries to address global inequalities aren't sufficient to overcome the large differences in living standards. It is only effective if aid is provided long-term. - In 2022, high-income economies provided \$US204 billion worth of development aid. - Phantom aid are funds that don't improve the lives of the poor and critics argue that this prevents developing economies from becoming independent in future developments. - Some advanced economies may only help for an economic or political motive to receive aid or help in return, further disadvantaging the developing economy. - Furthermore, the distribution of aid by high-income economies is not efficiently sent to developing economies but rather the money toward improving the standard of living is wasted. - The WTO established a recent initiative, the Aid for Trade program which assists developing countries in overcoming the structural difficulties that limit their ability to successfully trade to increase their economic development. Global Technology Flows - Technology can help improve the inequalities for living standards but also create other inequalities in the economy.  - Economies that have better infrastructure and higher levels of education adapt to new technologies quicker, which allows these economies to improve their living standards as it improves their efficiency. - However, developing nations have difficulty accessing new technologies because it is expensive to obtain these new technologies which further increases inequality between economies. This restricts developing economies the improvement in standard of living that they need to economically develop. - In 2020, according to the World Bank, 10% of the global population didn't have access to electricity. - In 2022, the International Telecommunications Union estimated that around 1/3 of the world's population do not use the internet and 95% of those without it lived in developing economies. Therefore, in an extremely integrated globally developed world where many people are reliant upon technology, these economies become isolated.   Domestic Factors- Economic Resources - The difficulties economies face in acquiring and maintaining sufficient resources for the production process. Natural Resources - Economies with an abundant and reliable supply of natural resources such as oil and minerals use these resources to generate income by exporting these goods. The money received is used to improve the economy's standard of living, such as education and health, which is a positive direction toward economic development. - However, this abundance can cause the economy to heavily rely on the industries that produce these resources as a key driver of economic growth and not have a variety of exports. Labour Supply and Quality - Labour is an input to the production process for many sectors of the economy and therefore influences development levels. - High-income countries have highly educated and skilled labour resources, which allow for economic growth because its - Low-income countries have high population growth, lower levels of educational attainment and low health standards. This reduces workforce participation and productivity which leads to decreased economic growth - Economies with a bigger population have a greater supply of labour, meaning they have the resources to become increasingly productive. - Economies with lower levels of educational attainment and health become decreasingly productive. This is because the lack of education reduces the workforce's skills necessary to perform jobs more efficiently. Furthermore, unhealthy labour causes higher rates of absence creating lower labour force participation which reduces the number of productive working hours for individuals, hence impacting the economic output and development. - Therefore, the increased quality and supply of labour for highly populated and developed economies and the decreased quality and supply of labour for less populated and developing economies causes greater inequalities between nations. Access to Capital and Indebtedness - Low levels of income make it difficult to gain access to capital for investment and development as well as less savings used for investment. Additionally, poor financial systems make it difficult for businesses to gain easy access to loans for investment. This prevent economic growth, hence lessening the funds obtained for economic development. Entrepreneurial Culture - Economies with strong civil society institutions a cultural disapproval of corruption, respect for law and labour inspired to work are more likely to develop and grow.  - Eg. The United States are have a strong entrepreneur culture where people are taught and inspired to start a business (anyone can become one). Whereas countries like China have a weaker entrepreneur culture where people are taught to work hard as a means to become successful and people don't usually take the risks to start a business.  High Levels of Inequality - High levels of inequality lead to lower rates of economic growth and development as the income distributed throughout the economy is uneven and is not used in areas to improve economic development. Domestic Factors- Institutional Factors - Includes political stability, legal structures, central bank independence, extent of corruption strength of social institutions and the government's domestic and external economic policies, affecting whether a nation can achieve economic development. Political and Economic Institutions - Countries with high levels of corruption (weak government) will have lower levels of economic development as the government doesn't have the money to use to improve the economy's overall standard of living. Furthermore, investors will be reluctant to take risks if the business is likely to collapse due to legal influences of the economy. - 2 billion people live in conflict-affected areas. Cultural Factors - Gender inequality and preferences in various cultures can lead to lower employment which decreases the economy's overall productivity and hence lower social development. Economic Policies - Governments use economic policies to balance the roles of market forces and government intervention. - If left to market forces, economies may achieve a high level of economic growth but it may not improve economic development. - However, excessive government control over economic decision making can prevent entrepreneurship and innovation, stunting economic growth. Government Responses to Globalisation - Trade, financial flows, investment flows, TNCs, and the country's participation in economic organisations policies can cause economies to take advantage of the benefits of integration. These include efficiency, access to foreign capital, overseas goods markets, technology and economic restructuring. - Eg. East Asian economies were open to trade and foreign investment, leading them to experience the strongest rates of economic growth. Reasons for differences in nations Causes of Inequality in the global economy: Reasons for the differences The impact of globalization on economic growth and development - Globalisation positively impacts economic development when economic growth is positive, raises income levels, provides greater resources for education and health, and funds for programs to clean up the environment. - Globalisation negatively impacts economic development when there is increased income inequality and accelerated climate change and environmental damage. Eg. Zimbabwe, Russia - "Globalisation has produced an acceleration of economic growth, though the effect has been distributed unevenly across geographical regions." - Developing and emerging economies have seen an accelerating rate of growth due to greater opportunities to grow as well as benefitting from better access to new technologies since they are not as globally integrated as advanced economies. By interacting with international trade, foreign investment and participation in transnational corporation, which are all activities that contribute to globalization, these economies become more globally integrated and therefore has led to higher economic growth. Globalisation allows for raised income levels, provides greater resources for education and health, and funds for programs to clean up the environment.  - However, advanced economies have seen a comparatively weak growth since the Global Financial Crisis and its effects. As these economies are so highly interconnected, any changes affecting one economy can have significant effects on other economies, which makes it difficult for an individual economy to experience significant periods of growth. Furthermore, globalisation can cause income inequality as it leads to international businesses to outsource low-skilled jobs to lower-wage countries as well as move their assets and investments in countries that have favourable tax regimes. Globalisation can also accelerate climate change and environmental damage as the increased transportation of trade and resource allocation to energy-intensive production has reduced the resources allocated to address the accelerating climate change. Hence, has widened the gap between growth and development.  The impact of globalization on the distribution of income and wealth (income inequality) Distribution of income and wealth - The benefits of globalization are not shared equally amongst developed, emerging and developing economies. - Stats: most developed countries have a minute proportion of their population living below the international poverty line, while developing countries have over 50% of their population living below the international poverty line. - 18% of the world\'s population (approx. 1 billion) live below the international poverty line (\$US1.90/day PPP). - The GINI Index/Coefficient is the number between 0 and 1 that measures the extent of income inequality in an economy. It is calculated by measuring the degree to which the Lorenz curve (graphical representation of the distribution of income or wealth in a society) deviates from the line of equality. - Trading increases agricultural workers in developing countries' incomes. - Lower tariffs (tax on imported goods) increase access to goods. - Increased financial flows create employment opportunities and economic growth in developing countries. - Highly skilled workers in emerging countries are leaving to seek better employment opportunities and pay in developed countries, resulting in those countries experiencing brain drain unemployed. - Technology (automation) shifts production away from low-skilled labour and towards higher skilled jobs, increasing unemployment for less skilled workers. The impact of globalization on trade, investment and TNC's (transnational corporation) - IMPACT: globalization has resulted in substantial increases in the size of trade flows and foreign investment (\$32 trillion in 2022). - TNC's are businesses involved in international production of goods and services, foreign investments, income and asset management. In this globalized economy, TNC's are increasing their dominance in business activity internationally due to the removal of restrictions on foreign ownership and the development of global capital markets. - Stats: 1/3 of the world's total exports and employs approx.. 79 million people in 2016 - TNC's perform better than domestic firms in regard to productivity, quantity sold, production size, exports and market share. - Changes in the advancements of technology and government policy have fostered trade growth. - Since the late 2000s, 2/3 of global trade is in intermediate goods. - Globalisation of financial markets has seen an increase on the reliance of foreign sources of finance for investment as countries have greater access to overseas funds for investment. - Trends: FDI (foreign direct investment; when an individual from outside Australia acquires 10%+ of an Australian business) increased significantly between 1990 and 2012 due to emerging economies that have loosen their barriers to foreign investment. - If TNC's increase links with the local community and assist local suppliers, FDI inflow can be done well. The impact of globalization on financial markets - Governments have encouraged the development of global financial markets by removing "capital controls" (action taken by the government to limit the flow of foreign money in and out of a domestic economy) on the flow of finance, floating exchange rates (where country's currency price is determined by the foreign exchange market) and deregulating their domestic banking sectors. - Positive: - globalization has allowed the ability for international transactions to occur. - it also makes it difficult for businesses to access loans or attract investors. - encourages greater transparency of the actions of governments and businesses. - fosters economic growth. - Negative: - if an investor decides to turn against a particular economy, it can result in the collapse of exchange rates which can cause a recession, increasing unemployment. The impact of globalization on environmental sustainability - increased levels of economic growth will lead to increased use of limited natural resources. - Humans focus on maximizing natural resources by extracting it out of the environment to sell rather than how can we sustainably remove resources from the earth. - Negative impact: deforestation, pollution (due to high levels of industrialization from energy usage in factories). - Emissions that contribute to climate change are from individual countries, however the effects will affect have a flow on effects toward the whole world. - Advanced economies not helping developing countries, the Green Climate Fund helps to address this issue. - UNFCCC coordinates agreements between economies to reduce carbon emissions. - Global community's should watch TNCs being in different countries and not take advantage of being in multiple countries to evade their environmental responsibilities. - Advanced economies have created many of the global environmental problems that exist through their high levels of carbon dioxide emissions caused by industrial pollution and high levels of energy consumption. - Developing countries have pursued economic development but often at the cost of environmental quality (deforestation, desertification) as they expand agricultural production. The impact of globalization on the international business cycle - More integration = more vulnerable they are to the crisis that occur (TNCs) but also the benefits if there is economic growth. - Globalisation makes more countries vulnerable to economic crisis. - The closer the links between nations the greater the risks and benefits in the global economy - Eg. GFC 2008-2009 - Benefit: integration allows countries to achieve faster rates of economic growth by specializing in particular types of production and by engaging in trade. - Disadvantage: integration makes economies more exposed to downturns in the international business cycle and the developments in their region - Increased integration means macroeconomic policies need to be coordinated. Activities include multiple countries collectively lowering fiscal policy or monetary policy so that the impact of this change occurs faster where economic activity is stimulated. - IMF following GFC encouraged countries to use their combined budgets to stimulate economic activity. - Economists believe greater coordination regarding economic management and financial regulation is needed between nations to better manage the international business cycle and prevent the events that occurred in the GFC. This is because changes in the international business cycle has significant impact on economic growth and development in all economies. - As a result of these fluctuations, world demand will adjust, affecting growth in world output, trade and investment flows. - This coordination only occurs when the world is in global crisis and not all the time because it doesn't benefit their own growth and their own activities.