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THE GLOBAL ECONOMY
INTERNATIONAL ECONOMIC INTEGRATION.
GLOBAL ECONOMY Sum of interactions between economies of individual countries that are increasingly linked together in one economic unit.
GLOBALISATION Integration between different countries & economies with increased impact of international influences on life & economic activity.
GROSS WORLD PRODUCT Sum of total output of g/s by all economies over period of time.
WORLD TRADE ORGANISATION (WTO)
Organisation of 164 member countries that implements and advances global trade agreements and resolves trade disputes between nations.
SPECULATORS Investors buying and selling financial assets, aiming to make profit from short-term price improvements. Create excessive financial market volatility.
INTERNATIONAL MONETARY FUND (IMF)
International agency of 189 members and oversees the global financial market’s stability. Functions are to ensure stability of exchange rates, exchange rate adjustment and convertibility.
TRANSNATIONAL CORPORATIONS (TNCs)
Global companies dominating global product and factor markets. Have production facilities in and owned by residents of at least 2 countries.
MIGRATION Movement of people between countries on permanent/long-term basis – 12 months or longer.
INTERNATIONAL DIVISION OF LABOUR
How production process tasks allocated to different people in different countries around world.
BUSINESS CYCLE Fluctuations in level of economic growth due to domestic or international factors.
GROSS DOMESTIC PRODUCT (GDP) Total market value of all final goods and services produced in an economy over a period of time.
INTERNATIONAL BUSINESS CYCLE Fluctuations in level of economic activity in global economy over time.
The Global Economy.
Global Economy: sum of interactions between economies of individual countries that are increasingly linked
together in one economic unit.
Economies of individual countries linked to each other & changes in one has a ripple effect on others.
International economic integration: economic activity going on in world.
Integration of individual economies to become global market.
Globalisation has caused convergence of economic structures and policies – becoming more similar.
Convergence through e.g. deregulation of financial markets, dominance of TNC’s, decreased protection.
Gross World Product.
Gross World Product (GWP): sum of total output of g/s by all economies in world over period of time.
2016 GWP: $US 73 trillion.
50x nominal level in 1960
Volume of world trade 125x level in 1960.
Globalisation: leads to actual movements across nations of:
Globalisation: increasing integration between different countries & economies and increased impact of
international influences on all aspects of life and economic activity.
Increased flow of TPITCI among countries = trade, people, investment, technology, culture, ideas.
Actual potential to move trade, investment, technology, finance and labour between nations.
Increasing cross-border transactions as countries “move closer” by breaking down:
1. Man-made barriers – through: labour, investment, finance, trade, technology.
2. Natural barriers.
Lead to increased synchronisation of international business cycle worldwide.
Characterised by shift away from distinct national economies.
Aim to improve living standards.
Driven by technology and liberalisation of trade.
- Trade in goods and services – stats, why trade ↑, composition, direction. Measure of how g/s produced in an economy are consumed in other economies around world.
Increased due to Globalisation.
Trade ↑ from 36% of global output in 1986 ($US8.7 Trillion) to 58% of output in 2016 ($US42.5 Trillion).
Gross World Product: aggregate value of all g/s produced worldwide each year in global economy.
GWP 50% nominal level in 1960.
Volume of world trade ↑ to 125x 1960 level.
Annual trade growth 2x level of world economic growth trade more volatile than GWP.
Growth of world trade contracts faster than world economic output.
High global trade reflects:
o That economies: don’t produce to satisfy all needs, varying efficiencies.
o Increased technology in transport & communications reducing cost of moving goods.
o Economies encouraging trade by removing barriers (REDUCED PROTECTIONISM &TARRIFS) &
joining international and regional trade groups – E.g. World Trade Organisation: implements and
advances global trade agreements and resolves trade disputes between nations.
Changing composition of trade:
o In past – dominated by manufactured goods 95% in 1995.
o Future – trade in services will increase services 20.7% traded in 2014 – 1.7% ↑ from 1995.
o Services = 33% of global ouput, 25% global exports.
o Growth in trade of fuels and minerals from increased prices 7% in 1995, 11.7% in 2014.
o ↑ demand for fuel/minerals from emerging industrialised economies – disregarded environment
= ↑ economic growth in countries producing them e.g. Aus who had a comparative advantage.
Changing direction of trade flows:
o Reflects changing importance of different economic regions.
o N. America and Western Europe overall share of global trade ↓ from 82% (1995) to 67% (2015).
o East Asia and Pacific Region share of global trade increased from 7% (1995) to 19% (2015).
o Trends in direction of trade impact individual economies – importance of Chinese economy put
increased importance on trade relationships with China e.g. by increasing investment in domestic
industries demanded by China.
o Continued dominance by richer nations = slow demand in industrial economies.
Trade = determinate of long run growth and rising living standards.
- Financial flows. Finance is most globalised world eco feature – money moves faster than goods, services or people.
Financial flows grown at 10x rate of world GDP.
Globalisation occurred most rapidly in global finance – few barriers and driven by speculation.
Increased due to Globalisation linked financial markets greater access to equity and foreign
exchange markets.
Globalisation of fin market = increased reliance on foreign finance for investment.
Growth result of fin deregulation, technological advances, phasing out controls of foreign exchange
trading in 70s.
Main participants in Foreign Exchange Market:
1. Firms: exporting/importing.
2. Firms: borrowing/lending money overseas.
3. Individuals indirectly through buying imports.
4. Government – Reserve Bank dirtying float change direction of currency.
Expansion of international financial flows:
o Growth of exchange-traded derivatives = major instrument in global financial markets
exchange-traded derivatives in 2016 $US73 trillion – almost size of GWP.
o Expanded from financial deregulation in 1970s/80s facilitated growth of international finance
– controls lifted from foreign currency markets, flows of foreign capital, banking interest rates.
o Freer flow of investment and finance.
o Technology enables money to move quickly between countries.
o New technologies and global communications networks linked global financial markets allowing
international events to produce immediate results.
Growth of FOREX markets:
o Foreign exchange markets: networks of buyers and sellers exchanging one currency for another
to facilitate flows of finance between countries.
o Exchange rate: value of currency expressed in terms of another currency.
o FOREX markets daily turnover of $5.5 trillion in 2014 from $4 trillion in 2010.
Speculators drive global financial flows:
o Speculators: investors buying and selling financial assets to make short-term price movements.
o 95% of all FOREX transactions.
o Aim = generate profits or hedge against future movements and minimise risk of losses.
o Cause volatility and instability.
Government intervention in financial markets to maintain confidence.
Benefit of greater global financial flows:
o Enables countries to obtain funds to finance domestic investment.
o Helpful for countries with low national savings levels to undertake investment projects.
o Helps countries achieve higher level of investment/growth.
Disadvantage of greater global financial flows:
o Speculative behaviour creates volatility in foreign and domestic exchange markets.
o Trend established in asset prices continues.
o IMF objective to stabilise individual economies experiencing financial turmoil to prevent flow-on.
o Speculation e.g. 2016 fall in pound following “Brexit” referendum result for the UK leaving EU.
- Investment and transnational corporations. Relates to investment by TNCs which is FDI.
Growth of investment since 1970s between countries indicator of globalisation.
2 types of global investment flows:
1. Portfolio investments: short-term speculative shifts of money. Buying <10% of shares.
2. Direct investment: long-term money flows to establish business or buy >10% of shares.
Foreign Direct Investment (FDI) measures globalisation of investment:
o Foreign Direct Investment: the movement of funds directly invested in economic activity or
purchase of companies.
o Accounts for under 20% total investment.
o FDI flows influenced by level of economic activity – surged in last 30 yrs.
o Risen from $US 44 billion to in 2015, $US1.76 Trillion.
o UNCTAD projects trend will continue with FDI flows surpassing $1.8 trillion.
o FDI flows favour developed nations with greater industrial capacity and large consumer markets.
o Last 5 yrs, developing countries received over 50% FDI inflows, stimulated by growth of China,
India, Mexico and Brazil.
o Developing nations increasing share of FDI outflows - ↑ from 13% in 2005 to 35% in 2014.
o FDI crucial in Australia for economic expansion and growth.
o FDI flows fell in 2012 which mainly impacted advanced economies, not developing.
Transnational corporations (TNCs) contributed to increased trade and financial flows by sourcing foreign
inputs, overseas manufacturing and packaging/marketing in other countries:
o TNCs: global companies dominating global product and factor markets – production & owners in
over 2 countries.
o Drive growth in developed and developing economies.
o E.g. Apple, Shell, Toyota – bring foreign investment, new technologies, skills and knowledge.
o Governments encourage establishment thorugh tax concessions.
o Since 1990s, TNCs grown 37 000 to 320 000 employ 79 million.
FDI flows driven by TNCs – involve transfer of technological innovations between economies.
Increased level of international mergers and takeovers from growth of international investment:
o Mergers reduce no. of global companies in different product markets e.g. Kellogg’s & Pringles.
o Cross-border mergers and acquisitions (M&As) reached $US1.6 trillion in 2007.
o 2015 – M&As 45% of 2007 level – recovering from GFC bc respond to economic conditions.
80% of investment from domestic sources.
- Technology, transport and communication. Technological developments facilitate integration of economies – driver of globalisation.
Technologies adapting to new tech are most closely integrated with other economies.
Cost of global communication is declining and innovative tools are becoming easier to use.
Role in trade, finance, investment and labour movements:
o Developments in freight technology with efficient logistics systems facilitate greater trade of g.
o Cheaper/reliable international communications through high-speed broadband allows
commercial services delivered to customers globally.
o Finance and investment technology uses communication networks for money to move around
the world instantly.
o Smartphones changing structure of industries.
o Advances in transportation allows greater labour mobility between economies.
Technology influences globalisation as a driver of growth in trade and investment:
o Trade spreads new technologies.
o Technology represents major trade opportunity.
o US earns export revenues from global leadership in new technology.
o US receives 50% of royalties and license fees from world’s technology transfers and remaining
gains shared amongst other developed nations.
o Other countries import technology from leading countries hoping that by adopting new tech can
become innovators.
Technology drives increased investment:
o Business corporations that develop new technology move into overseas markets with high
education/training to sell g/s directly to local buyers e.g. Google, IBM.
Internet links business, individuals and nations to global economy:
o Allows greater communication and reduces costs.
o Use of internet increased 480% between 2000 and 2011.
o 3.2 billion Internet users.
o Rapid spread of technologies across countries and interconnected nature of global economy.
o Social media contributing to acceleration in globalisation – social media used as part of global
marketing efforts 7 billion smartphone subscriptions.
- International division of labour, migration. Labour markets less internationalised.
Migration increased in 1960s 3% of world migrated to work in western nations.
20% of workers in western nations = migrants
World Bank: 243 million who have migrated to work, 3% of world population – double 1990 amount
Rising labour supply pressures and income inequalities will increase level.
Labour migration into OECD (Organisation for Economic Cooperation and Development) member
countries fell from reduced job security in 2000s increasing in future from EU, US, AUS.
Labour movement between economies concentrated at top & bottom ends of labour market:
o Top end:
Highly skilled workers attracted to richest economies e.g. US, for higher pay and opportunities.
Immigrant population in high-income countries increased from 7 to 11%.
Australia has “brain drain” – losses educated offshore.
Global market for highly skilled labour.
o Bottom end:
Low-skilled labour demanded in advanced economies where difficult to attract domestic
workers for certain jobs.
Trends reflect international division of labour:
o International division of labour: people move to jobs where skills needed, while globalisation of
labour market increasing, but still significant barriers to working in other countries.
o International division of labour: people move to jobs around world where skills in high demand.
o International division of labour: production process tasks allocated to different people in
different countries.
o Barriers e.g. language.
o Evident in the shift of businesses between economies to improve efficiency/cost-effectiveness,
rather than shift of people shift between economies.
o Produces operate with global supply chain.
o “Offshoring” allows shifting production between countries to reduce costs = export oriented
economies competing on abundance of low-wage labour.
o Offshoring increased for manufacturing and now service functions.
International division of labour reflects ‘comparative advantage’:
o Comparative advantage: economies specialise in producing g/s can produce at lowest
opportunity cost – top end, bottom end.
o E.g. developing economies have many workers w basic education level comparative
advantage in labour-intensive manufacturing.
o Jobs lost as firms switch production to countries with lower per unit costs.
o Advanced economies focus on specialised services using highly skilled workers in greater supply.
International and Regional Business Cycles.
Business Cycle: fluctuations in level of economic growth die to domestic or international factions – caused by
changes in level of aggregate supply and demand.
International business cycles.
International business cycle: fluctuations in level of economic activity in global economy over time.
Increased integration speeds up transmission of economic conditions across countries.
Economic growth stronger when rest of world growing strongly.
Trade and economic growth synchronised.
Australian economy affected by international interest rates – small open economy.
63% of changes in level of output due to changes in interest rates, growth levels and inflation rates in
Group of Seven (G7) international factors more impactful than domestic.
Factors assisting transmission of economic conditions from one country to another:
1. Trade Flows.
o Level of growth in economy has flow on effects to economic activity of trading partners.
o Boom/recession in one country, affects demand of g/s from other countries.
o Production in trading partners will decrease and leads to decrease in economic growth.
o E.g. GFC – 25% decline in US growth transmitted to other economies.
2. Investment Flows.
o Economic conditions in one country affects whether businesses in that country invest in other
countries – affects the other country’s economic growth.
o Strong conditions allows foreign investment which creates further growth.
o E.g. weakness of US and EU limited growth in FDI inflows to developing countries this decade.
3. Transnational Corporations.
o TNCs important means by which global upturn & downturn spread throughout the global economy.
o TNCs expanding productive capacity internationally are spreading economic growth.
o UNCTAD found that in 2015 growth in TNC sales and assets valued at $142 billion.
4. Financial Flows.
o Short term financial flows transmit financial conditions from advanced countries to emerging
countries reason for rapid spread of GFC.
o Short term financial flows also transmit the international business cycle.
o Countries with strong financial integration experience increase in financial flows between
themselves in response to common shocks.
o E.g. ‘Brexit’ referendum vote saw increased financial flows between other advanced economies.
5. Financial Market and Confidence.
o Consumer/investor confidence influenced by conditions in other countries.
o Influence highlighted by strong correlation between movements in share prices of major stock
exchanges and events threatening global stability which spark downturn in share value.
o AUS share prices reflect US share prices.
6. Global Interest Rate Levels.
o Monetary policy conditions in one economy influenced by interest rate changes in other countries.
o Choice of interest rates in one country influences another country’s decision.
o Higher interest rates make borrowing more expensive for emerging and developing economies
reduce investment in them by 1.8% of GDP and slowing growth.
7. Commodity Prices.
o Prices of key commodities play role in level of inflation in world economy and effect features of
international business cycle.
o Commodity prices increase inflation increases = lower investment, employment, growth = decline
in international business cycle.
o E.g. emerging economies dependent on oil imports & price ↑ has negative effect vs. middle east
exports oil & price ↑ beneficial.
8. International Organisations.
o Discussion of global economic conditions at summit meetings of G20 or G7 means they can act as an
unofficial coordinators of global macroeconomic policy during economic uncertainty.
o G20 and G7 influence global economic activity & affect economic decisions of other countries.
Factors weakening international business cycle / factors influencing business cycle differing between
economies:
1. Interest Rates.
o Interest rate level different between economies resulting in different levels of growth in each.
o Higher interest rates contraction in economy dampen economic activity.
o Lower interest rates expansion in economy stimulate economic activity.
2. Government Fiscal Policies.
o Government policies impact in short to medium term.
o ↑ taxation or decreases expenditure = dampen economy.
o Decreases taxation of ↑ expenditure = stimulate economy.
3. Exchange Rates.
o Impact level of trade competitiveness, imports, exports and confidence within economies in turn
influence growth.
o E.g. $AUD increases against $USD – imports cheaper, exports more expensive – contracts growth.
4. Structural Factors.
o Differ between economies and influence competitiveness of economies and growth.
o Refers to different ways a government manages an economy.
o E.g. different methods of regulating labour markets, regulating businesses, different levels of
innovation.
5. Regional Factors.
o Physical location of economies and their involvement in trade relationships, agreements and
international organisations, will affect economy’s involvement in the global market.
o Economies closely integrated with neighbours are influenced by their economic performance.
o E.g. Australia affected by China’s growth.
Regional business cycles.
Regional Business Cycle: fluctuations in level of economic activity in a geographical region of the global
economy over time.
Regional business cycles result from increased cross-border integration.
Business cycles of different regions interact to drive level of economic activity globally.
Regional business cycles differ from global economic conditions.
Dominated by largest economies problems in smaller economies trigger problems in other areas.
World’s largest economies by nominal GDP 2015 – world bank:
1. US – $US17.9 trillion.
2. EU – $US16.2 trillion.
3. China – $10.9 trillion.
North America:
o Changes in US economy have ripple effect throughout world – more pronounced impacts on
North America, Canada, Mexico from integration through NAFTA.
Europe:
o 28 (27 after Brexit) economies in EU influenced by activity levels in France and Germany.
o Conditions in France and Italy weakened by turmoil in Greece.
o Accounts for 33% of global trade.
East Asian Region:
o Economic conditions are dominated by influences of China and Japan.
o Asian regional business cycle strengthened due to ↑ integration between Asian economies.
o China and Japan slowed down in 2016 but region still experienced growth from upswing
elsewhere in region.
o Australia’s growth is dependent on growth of East Asian Region.
Sub-Saharan Africa:
o Regions with higher proportion of developing or low income countries are less regionally
integrated excluded from trading blocs and less technology.
o Chad, Uganda and Sierra Leone dependent on high income economies for 80% export income
influenced by world economy conditions, not regional conditions.
Europe and central Asia:
o Smaller economies affect performance of regional economies even if not dominant/integrated.
o E.g. Russia and Ukraine tensions this decade reduced growth, trade and economic policy across
Europe and central Asia.
Factors STRENGTHENING international business cycle. Factors WEAKENING international business cycle.
1. Trade flows. 2. Investment flows & investor sentiment. 3. Transnational corporations. 4. Financial flows. 5. Technology. 6. Global interest rates. 7. Commodity prices. 8. International organisations.
1. Domestic interest rates. 2. Government fiscal policies. 3. Other domestic economic policies. 4. Exchange rates. 5. Structural factors. 6. Regional factors.
TRADE, FINANCIAL FLOWS AND FOREIGN INVESTMENT.
Growth in world trade greater than growth in global economy – countries trading more than producing.
Trade unites countries, creates wealth and restructures economies.
COMPARATIVE ADVANTAGE The economic principle that nations should specialise in areas of production they have the lowest opportunity cost and trade wiith nations to maximise both nations’ standards of living.
OPPORTUNITY COST Represents alternative resource use – cost of satisfying one water over an alternative want.
FREE TRADE No artificial barriers to trade imposed by governments to shield domestic producers from foreign competitors.
PROTECTION Government policies that give domestic producers an artificial advantage over foreign competitors e.g. tariffs on imports.
DUMPING Practice of exporting goods to a country at a price lower than selling price in country of origin.
TARRIFS Taxes imposed on imported goods to protect Australian industries.
QUOTAS Restrictions on amounts or values of goods that may be imported.
SUBSIDIES Cash payments from government to businesses to encourage production of g/s and influence allocation of resources in an economy – help compete with overseas produced g/s.
TRADE BLOC When several countries join in a formal preferential trading agreement to the exclusion of other countries.
Basis of Free Trade.
Free trade: where governments impose no artificial barriers to trade that restrict the free exchange of goods
and services between countries to shield domestic producers from foreign competition.
Basis of free trade = increased efficiency by 1 country producing goods and services that it can produce with
fewer resources and at a lower cost than another country.
Economic assumption: trade is positive & economies achieve ↑ growth in a free trade environment.
Adam Smith’s Absolute Advantage – theory states increasing nation’s wealth requires removal of
protection and encouraging specialisation in products that they can produce at a greater quantity with
given resources than another economy is able to = more g/s at lower prices = higher standards of living.
Why countries trade:
o Lack of resources – no country able to satisfy demand totally.
o Differing factor endowments – quality and quantity of certain resources differ between nations.
Basis of international trade + argument FOR free trade = concept of comparative advantage:
o Comparative advantage: economic principle that nations should specialise in production areas in
which they have the lowest opportunity cost and trade with other nations to maximise both
nations standard of living.
o Comparative advantage: economy has a lower opportunity cost of producing a good from
another economy – international trade is beneficial economies based on their comparative ad.
o Focuses on relative efficiencies of production opportunity cost not financial or FOP cost.
o Comparative advantage when greater resource efficiency by specialising in production of g/s.
o Structural issues moving to production of g.s with comparative advantage:
Sunset industries: only survived from protection – disappear altogether.
Infant industries: new industry with comp ad faces difficulty from free trade making them
compete with international firms who have eco of scale.
Free trade allows nation to produce g/s efficiently and specialise in production surplus exported to
less efficient country = greater choice.
Comparative efficiency from comparative advantage measured by opportunity cost:
o E.g. Opportunity cost of producing coal in AUS lower than US, AUS has comparative advantage in
coal production.
o International specialisation – country specialises in g/s that give cost advantage over other
countries – benefits seen in principle of comparative advantage.
Advantages of Free Trade.
1. Trade allows countries to obtain g/s cannot produce themselves in sufficient quantities to satisfy
domestic demand from inadequate resources.
2. Allows countries to specialise in production of g/s can produce efficiently = better resource
allocation and increased world production.
3. Encourages efficient allocation of resources – used more efficiently bc countries producing goods
have a comparative advantage.
4. Tendency for specialisation leads to economies of scale lowering average production costs while
increasing efficiency and productivity.
5. Improved international competitiveness as domestic businesses as governments encourage
domestic efficiency from competitive pressures from foreign producers.
6. Innovation and spreading new technology and production processes throughout world.
7. Higher living standards from lower prices, ↑ g/s production, ↑ choice from accessing goods that
lack of natural resources would otherwise prevent.
8. Opening up global markets leads to ↑ rates of economic growth and ↑ real incomes.
9. Shrinking/collapsing of inefficient industries.
10. Wider market beyond domestic.
11. ↑ living standards from access to greater variety of g/s.
12. ↑ economies of scale with large scale necessary from wider market.
Disadvantages of Free Trade.
1. ↑ in short-term/structural unemployment from domestic bus unable to compete with imports:
o Corrects itself in long-term as domestic economy redirects resources to production w
comparative advantage.
2. Difficult for less advanced economies to establish new businesses/industries if not protected from
larger foreign competitors.
3. Production surpluses from other countries ‘dumped’ on domestic market, hurting efficient domestic
industries.
4. Encourages environmentally irresponsible production methods by producers winning markets by
undercutting competitor’s prices by undercutting environmental standards.
5. Cutting tarrifs decreases government revenue.
6. Poorer countries don’t have bargaining power to secure fair price for g/s.
7. Protected industries must restructure, resulting in unemployment – closing of factories/industries &
having political consequences.
Protection.
Protection: government policies giving domestic producers an artificial advantage over foreign competitors.
Main protectionist measures: tariffs, import quotas, subsidies.
Protection should be temporary, otherwise no real incentive for industry to become efficient and
achieve comparative advantage.
Short-term – lower protection harms economic outcomes of growth, positive effect in long-term.
Australia has lowered protection since 70s.
Prevention of dumping is the only justifiable reason for protection.
The only non-economic reason for protection is defence.
Protection is incongruent to a global economy/globalisation.
FOR protection:
1. Help infant industries establish themselves.
2. Protects local jobs being lost because of cheaper imports.
3. Country can remain self-sufficient in important areas.
4. Prevent foreign companies dumping goods on domestic markets at unrealistically low prices.
AGAINST protection:
1. Distorts resource allocation towards less efficient sectors = less internationally competitive.
2. Higher unemployment, lower standards of living.
Economic reasons for protection.
- Infant industry argument. Infant industries need to be shielded from competitors in short run to enable them to build capacity,
establish markets and achieve economies of scale to compete in global economy.
Develop and establish domestic industries.
If protectionist policies never removed – no incentive for industry to reach level of efficiency to compete
without protection continue to rely on assistance & supports unviable industries.
Result of continued protection = ↑ prices for consumers, inefficient industries & resource misallocation.
Government should provide temporary assistance to industries able to achieve comparative advantage
in long run.
Economists do not favour this protection in long-term.
- Dumping. Dumping: when foreign producers sell goods on the domestic market at below-production prices.
Occurs because overseas producers have production subsidised allowing selling below production cost
and encouraging increased production levels.
Used to: dispose of production surpluses OR establish market position in another country.
Prices are temporary.
Dumping harms domestic producers – local firms forced out of business causing loss in country’s
productive capacity and ↓ employment.
Benefit: lower prices for consumers in short term increase prices once competition eliminated.
Countries abuse entitlement to prevent dumping to give domestic producers competitive advantage.
4750 anti-dumping complaints lodged with WTO since 1995 Australia ranks 9th in complaints lodged.
- Domestic employment. Protect local industries to ensure there are employment opportunities in the domestic economy.
↑ demand for local goods & domestic employment if protected from comp with cheap foreign imports.
Protection will negatively:
o Distort allocation of resources in economy away from efficient production to less efficient
production.
o Long-run = higher levels of unemployment and lower growth rates.
Phasing out protection will create better/lasting jobs in other economic sectors which are more
internationally competitive.
Retaliation effect of protection:
o If a country protects industries others will retaliate and adopt protectionist policies.
o Country will maintain employment in less efficient, protected industries & lose employment in
efficient export industries.
- Environmental factors. Countries block trade in goods due to environmental harm caused in their production.
Overseas producers produce items cheaply because producers are environmentally irresponsible &
don’t comply with tougher standards in advanced economies.
Non-economic reasons for protection.
- Defence. Reduces a country’s dependence on foreign producers and increases self-sufficiency importance of
sectors.
Defence industries (aircraft, shipbuilding, mineral processing) need to be protected for defence
purposes by major superpowers.
In case of war, need to be self-sufficient and not depend on countries one may be at war with.
Retain on defence industry to be able to produce equipment during war.
Production takes place regardless if cheaper to produce overseas.
- Self-sufficiency. Protection is advocated so AUS can produce all necessary goods & not be dependent on other countries.
Protection provided to manufacturing industry to encourage growth to self-sufficiency not dependent
on other countries during war.
Australia produces 90% of own food and exports $31 billion of food.
Methods for protection & effect of protectionist policies on domestic and global
economy:
- Tariffs.
Tariff: government-imposed tax on imported goods imposed for the purpose of protecting Australian
industries.
Raises price of imported goods, making domestic producer more competitive.
Economic effects of a tariff:
Stimulates domestic production and employment by domestic producers supplying a greater quality
of the good.
Reallocation of resources towards less efficient producers as more domestic resources attracted to
protected industry.
Consumers pay higher price and receive fewer goods redistributes income away from consumers
to domestic producers.
Raises revenue for government.
Potential retaliation effect:
o In response to tariffs on imports, other countries impose tariffs on goods exported to them.
o Increased production and employment gains for import-competing industries offset by that
economy’s export industries.
- Quotas.
Quota: restrictions on amounts or values of various kinds of goods that can be imported.
Import quota controls volume of good allowed to imported over period of time guarantees domestic
producers a share of market.
A higher quota is an example of lower protection – more foreign goods are allowed into a country.
Economic effects of a quota:
Stimulates domestic production and employment in the protected industry by domestic producers
supplying greater quantity of good.
More resources in economy attracted to protected industry leading to reallocation of resources from
other sectors of economy.
Consumers pay higher price and receive fewer goods, resulting in lower growth.
Do not directly generate revenue for government can raise small amount of revenue by
administering the quota by selling import licenses.
Invites retaliation from country whose exports have been reduced from the quota – lower exports
for the country that initiated the import quota results.
- Subsidies.
Subsidies: cash payments to domestic producers from governments that enable them to reduce their cost of
production and compete with foreign producers.
Businesses will sell higher quantity of product to domestic and global markets.
Economic effects of a subsidy:
Stimulates domestic production and employment in the protected industry as domestic producers
supply greater quantity.
Reallocation of resources from other sectors of economy to protected industry.
Consumers pay lower price and receive more goods as subsidy shifts curve to right – consumers
indirectly pay for subsides through higher taxes.
Direct costs on government budgets because they are payments from government to g/s producer –
government has fewer resources to allocate to other priorities.
Economists prefer subsidies are they impose costs and are abolished more quickly.
- Local content rules. Local content rules: require that certain goods have a certain level of locally produced content.
Imported goods will not attract a tariff if guaranteed that percentage of good locally made.
E.g. television broadcasting to foster Australian content and culture, rather than protect jobs.
- Export incentives. Give domestic producers assistance & encourages businesses to penetrate global markets or expand
market share.
Provides economic growth and employment.
↑ popularity with focus on foreign markets rather than protecting import-competing businesses.
Export incentives do not protect businesses from foreign competition in domestic market but act as a
barrier to free trade.
WTO limits scope of export incentives.
Overall economic effects of protectionism.
Global protectionist policies reduce trade between nations exports and imports will be a smaller
share of a national economy. Reduce living standards and global economic growth by shielding inefficient producers – OECD found
each dollar of increased protection reduced GDP by 66 cents. More difficult for individual economies to specialise in production in which they are most efficient. Less competitive pressures, price on g/s in individual economies are higher. Impact of protectionist policies of trading blocs greatest for developing economies which are excluded
from access to markets of advanced economies.
Role of International Organisations.
Manage the efficient and fair functioning of economies and financial systems.
3 main international organisations = WTO, IMF, World Bank.
World Trade Organisation – WTO.
Role: implement and advance global trade agreement and resolve trade disputes between economies.
First international organisation with powers to enforce trade agreements across the world – legally
binding.
Main group promoting global free trade which developed from the GATT in 1995.
WTO formation out of GATT:
o General Agreement on Tariffs and Trade (GATT) process meant individual countries were
responsible to but agreements into place.
o No mechanism to enforce trade agreements.
o Uruguay Round (1986-1993) formed WTO agreements.
o Scope of trade expanded to include intellectual property as well as trade in g/s.
o WTO has 164 members in 2016.
o GATT and WTO seen as promoting interests of advanced countries at expense of developing.
Functions:
1. Make sure all future aim agreements uphold GATT principles.
2. Resolve trade disputes between members.
3. Pursue trade liberalisation in new areas.
Dispute resolution – WTO’s most important role:
o Country believes it’s suffering harm from another countries failure to comply with WTO
obligations lodge complaint with WTO.
o Dispute resolution commenced – if no agreement reached, WTO panel hears complaint & issues
decision.
o If not complying with WTO’s directive – country can impose trade sanctions e.g. high tariffs.
o Effective in dispute resolution of smaller countries.
o Less effective in dispute resolution between world powers – US and EU lodge appeals rather
than accept WTO decisions.
Decrease global protection levels – secondary role:
o 2014 – agreed on Trade Facilitation Agreement reduces cost of trade by 10-15% by making
customs procedures simpler and more efficient.
“Doha Round” OF TRADE LIBERALISATION – 2001:
o 2001 Ministerial Conference in Doha set out tasks for issues to help least-developed countries
increase their ability to trade and access markets.
o Sought to free up global trade by:
Reducing agricultural protection.
Lowering tariffs on manufactured goods.
Reducing restriction on trade in services.
o Doha Round trying to abolish $US 700 billion in tariffs/subsidies to lift 140 mil out of poverty.
o Doha talks suspended in 2006 – unable to reach consensus on reduction of protection.
o Efforts to revive Doha in 2009 failed because:
US and EU reluctant to reduce agricultural protection levels.
Emerging countries refused to increase access to manufacturing and service markets without
concessions on agriculture from high income countries.
Countries shifting towards focus on bilateral and regional trade agreements instead – declined in
importance due to trade blocs.
Since formation WTO has not concluded 1 major agreement – to accelerate free trade globally.
International Monetary Fund – IMF.
IMF established with World Bank after WW2 to aid and stabilise International Capital Markets.
Role: maintain international financial stability in relation to foreign exchange markets & assist economies.
Responsible for monitoring and stabilising international financial system through short-term financing of
balance of payments deficits by giving short-term loans to countries with balance of payments problems.
Lends money to member countries, in return debtor countries must undertake IMF economic reforms.
IMF and World Bank established at Bretton Woods conference in 1944 which designed post-war
economic system.
188 members – covering almost all nations most important institution in global economy.
Functions:
1. Seek stability in exchange rates.
2. Reconcile problems countries face internally from balance of payment problems.
3. Help preserve relatively free trade and payment in world economy.
When crisis occurs in individual economy – IMF develops rescue package to stabilise economy. E.g.
$US17 billion to Ukraine in 2014 when a security crisis threatened financial crisis.
IMF’s policies are to support free trade of g/s and free movement of finance/capital throughout world
markets.
Requires countries to adopt “structural adjustment policies” before receive assistance change
economic policies and open markets to make international banks willing to lend:
o Role in globalisation- encourage economies to adopt similar economic strategies.
Role in ensuring stability in financial markets:
o GFC of 2008.
IMF injected $US250 billion into global economy to promote liquidity in global financial systems
and support hard-hit economies.
Suspended payments on loans till 2011 to help developing nations deal with downturn.
Supported expansionary macro policies.
Gave borrowing economies greater control over macro policies & lent to govs ↑ spending to
avoid recession.
o Sovereign debt crises in Europe.
Large-scale loans and relief programs for 11 European economies.
2011-2014 – 80% IMF lending to Greece, Portugal, Ireland.
In 2015 – IMF avoided Greece defaulting on its foreign debt.
Required strict austerity measures e.g. reduced government spending.
IMF urged EU to make long-term debt commitments to debt relief for Greece and urged Greece
to commit to economic reforms.
Criticisms that IMF gave priority protection to EU monetary unions/banks, not people.
Measures demanded by IMF worsened the collapse of Greece with nominal GDP dropping 26%
lower than IMF projections “serious scientific and professional failure” in IMF response to
crisis, as said in IMF audit report.
Effectiveness:
o Criticism during financial crises where policies worsened conditions for affected economies.
o E.g. adopting contractionary macro policies during 1990s Asian fin crisis admitted mistakes.
o E.g. failure to account how financial crises affect countries in monetary union who have own
currency and can help adjustment process e.g. Greece.
World Bank.
International organisation focusing on granting loans to developing countries to reduce poverty and encourage
growth through economic development.
Function: promote growth and prosperity by providing long-term loans for investment – low interest
loans to developing economies for long-term infrastructure projects e.g. dams, roads, hospitals.
Main organisation: “International Bank for Reconstruction and Development” focuses on:
o Fund investment in infrastructure.
o Reduce poverty.
o Help countries adjust economies to demands of globalisation.
WB other organisation(s): “International Development Association”:
o Provides “soft loans” – those with little to no interest to developing countries.
IMF and WTO loans function in conjunction with each other.
WB funded by contributions from member countries and own borrowings in global financial markets.
Makes loans to developing nations at rates below standard commercial rates to fund infrastructure
projects active portfolio of investments = $US200 billion.
2015 - $US42.5 billion in loans, grants and equity investments to support programs to reduce global
poverty and encourage sustainable economic development.
WB 2 major goals:
1. Reducing rate of extreme poverty to under 3% of world population by 2030 at 3% poverty will be
frictional – supports UN Global Goals.
2. Reducing inequality by fostering income growth for the world’s bottom 40%.
Impact:
o Global importance as lender to developing countries declined as private lending markets ↑.
o Stabilised economies after onset of GFC when credit markets seized up ↑ annual leading to
low income economies from $US 14 billion to 35.
o Supported Heavily Indebted Poor Countries Initiative – aims to reduce debt by 2/3 in world’s
poorest countries.
Organisation of Economic Co-Operation and Development – OECD.
International economic organisation of 34 countries committed to democracy and the market economy –
forum in which governments discuss and compare policy experiences.
Role: conduct and publish research on economic policy issues and coordinate economic cooperation among
member nations. E.g. proposed internationally coordinated macroeconomic stimulus during GFC.
Aim: promote policies “to achieve the highest sustainable economic growth and employment and a rising
standard of living in member countries while maintaining fiscal stability and contribute to the world
economy”.
Only advanced economies.
Helps governments foster prosperity and fight poverty through economic growth and financial stability.
Function:
1. Boost sustainable growth and development.
2. Forum for discussion and coordination of policies.
Undertakes original economic research and compiling detailed economic information on advanced
economies than any other international organisation.
Most reliable and highest quality economic research in world.
Advocates globalisation, free markets, privatisation, deregulation & gov intervention for eco policy goals.
United Nations – UN.
International organisation founded in 1945 with near-universal membership (193 member states).
Overarching aims to stop wars and promote dialogue between nations to meet goals by fostering
cooperation – involved in economic development.
Agenda: global economy, international security, environment, poverty & development, international
law, global health issues.
Function:
1. Forum for discussion.
2. Promote peace and security.
3. Boost development.
Works with IMF and WB.
Supported greater linkages between economies and promoting globalisation:
o UN agencies developed international standards making it easier for trade and investment flows
between nations e.g. standards for food safety, rules on copyright and intellectual property.
Overseen development of international agreements to enforce human rights and political freedoms
individual freedoms are necessary for economic growth and addressing poverty in developing nations.
“Global Goals” aim to reduce poverty and inequality between 2015 and 2030:
o Build on Millennium Development Goals which reduced people living on under $1 a day between
1990 and 2015 from 29% to 14.5% in low to middle income economies result of rapid
economic growth in China lifting 600 mil out of poverty.
o 17 goals covering wellbeing, environment and human rights.
o Incorporate 169 targets UN member states pledged to take action towards.
Influence of government economic forums.
Forums important role in coordinating policies between major economies during times of crisis.
Aim: enable heads of state, treasurers and central bank governors discuss global economic issues with
attention to stability and growth.
G20 – Group of Twenty Finance Ministers and Central Bank Governors.
Established in 1999 to bring together important industrialised and developing economies to discuss
issues about the global economy and coordinating the global response to avert a depression.
Coordinate fiscal stimulus around the world and improve supervision of global financial system and
institutions.
Composed of: 19 largest national economies + EU 80% of world GDP and 2/3 of world population.
Include emerging economies driving growth since 2008.
Main activity is annual summit – no headquarters or permanent leadership.
Limited effectiveness:
o 2014 Brisbane summit G20 members agreed to goal of increasing economic growth by 2%.
o Policy changes pledged to support goal never implemented.
o Global growth even weaker 2yrs after summit.
G7/8.
Economic council of the wealthiest nations, meeting annually to discuss conditions in the global economy.
Unofficial forum coordinating global macroeconomic policy bc of influence over fiscal and monetary policies
of the world’s largest nations.
Last few decades it was the most important government economic forum.
7 largest industrialised nations: US, UK, France, Germany, Italy, Canada, Japan.
Russia included between 1997 and 2014 suspended after military seizure of Crimea.
Significance declining reflecting shift in global balance of power towards emerging economies e.g. China.
G7 membership no longer representative of important forces in global economy.
G7 share of global GDP shrunk from 68% in 1992 to 47% in 2015 covers only 10% of population.
G7 giving way to G20 as new permanent council for international economic cooperation.
Seeking to expand group to include 5 developing countries – the “Outreach Five (O5)”.
Trade agreements - trading blocs, monetary unions and free trade agreements.
Trade agreement: formal agreements between countries to breakdown protectionist barriers.
Countries have become more integrated and form trade alliances to ensure they’re in best position to
gain from growing trade opportunities and avoid being excluded from emerging trading blocs.
Trade agreements established to ensure individual countries establish strong ties in trade.
Trade agreements can be bilateral (2 countries), multilateral/regional (3 or more) or global:
Trading bloc: when a number of countries join together in a formal preferential trading arrangement to
the exclusion of other countries. E.g. EU, NAFTA:
o Regional trade agreements ↑ from 27 in 1990 to 423 in 2016 “regionalisation”.
o Trade within regional trade bloc varies:
E.g. 2/3 of European trade occurs within EU from being a closed trade bloc from protectionism.
E.g. ASEAN trade with economies outside region reflecting smaller economies and growth
reliant on exports to industrialised economies.
o Regional trade blocs could result in trade fragmenting into self-contained regions hindering
spread of global trade few trading outside of bloc.
o Against: trading blocs hinder speed of free trade.
o For: stepping stone towards free trade – convincing economies to reduce protectionism against
small group pf economies and then all trading partners.
Free trade agreements: formal agreements between countries designed to break down barriers to trade
between those nations: e.g. chAFTA.
o Better called = “Preferential trade agreements” because give more favourable access to g/s from
one nation or a group of nations compared to another.
o Can make it more difficult for nations outside preferential trade agreement to trade – may not
make conditions for free trade better.
o WTO global free trade agreements remove barriers to trade uniformly across all economies.
Monetary union: where 2 or more countries share a common currency e.g. EU.
Advantages and disadvantages of multilateral agreements.
Multilateral agreements lead to increased investment and capital and trade/investment flows rising as a
proportion of GDP for member nations.
Unilateral reductions in protection and movement of free trade preferable to trading blocs.
Trading blocs form barriers to other countries.
Blocs support inefficient industries and hinder developing economies in opportunities for fair trade and
economic development.
Regional agreements are tumbling blocks: form trading blocs which hinder process to global free trade
bc they slice world up into different trading areas.
Regional agreements are stepping stones: convince economies to reduce protection for small group of
countries eventually encourage them to reduce protection for whole world.
Asia-Pacific Economic Cooperation – APEC.
Established in 1990s for Australia’s region with 21 economies in response to formation of trading blocs
in other areas of the world e.g. EU and NAFTA.
Accounts for 40% world population, 57% world GDP, 47% world trade.
Encourages free trade.
NOT a trade bloc – just an economic meeting.
APEC made commitment to Bogor Declaration in1994:
o Bogor Declaration: target of free trade to be achieved by 2020 with developed nations
dismantling their trade barriers by 2010 and newly industrialising economies by 2015.
o APEC forum intended to be a free trade group that supports the WTO and addresses
impediments to objective of free trade.
o Never delivered on free trade goal only played modest role in advancing free trade
Non-discriminatory grouping – members can trade with countries grouping on same basis as members in
group, if prepared to equal access to markets.
Tariff levels in region fallen from 16.9% to 5.2% from unilateral decisions to reduce protectionism by
member economies.
Disadvantages:
o APEC declining in importance.
Advantages:
o APEC members negotiated TPP to further liberalise free trade across Asia Pacific estimated to
lift global GDP by $295 billion annually.
Trans-Pacific Partnership – TPP.
Multilateral trade agreement signed in February 2016 among 12 Pacific Rim countries.
Provisions of TPP include:
o Lower trade barriers.
o Giving corporations the right to sue democratically-elected governments for policy decisions
harming their investments – disadvantage.
Members represent 36% of global economic output and 24% of global exports.
AUS exports to TPP members in 2015 worth $105 billion – 1/3 of total exports.
World Bank estimates TPP could increase trade among members by 11% by 2030 & ↑ GDP by 1.1% for
member countries.