HSC Topic The Global Economy Economics

• The Global Economy (The flows of interdependent countries)

  
  

  A global economy is about the interdependent countries and the flow of goods and services, flow of finance, flow of capital and the flow of trades, labour, technology and ideas between nations all around the world.

  
  

  Finance, technology, capital, labour, ideas and trade
• Gross World Product of World Gross World Product

  
  

  GWP is the measure of goods and services produced globally

  GDP IS the measure of goods and services produced domestically
• Economic Integration is the countries freely trading with each other without any barriers. (elimination and removal of barriers)
• Globalisation

  Globalisation is the removal of barriers that prevent the flows of ideas, labour and technology etc, it is the countries becoming interdependent (depending on one another) to maintain economic activity.
• Globalisation

  trade in goods and services

  
  

  Free trade ~ There are no barriers such as tax or policies that prevent countries from freely trading with one another. ( NO GOVERNMENT CONTROL)

  
  

  Fair Trade ~ Every country has a right to participate in trade. There are barriers that ensure fair prices and better conditions for the producers, often in developing countries. 
• Globalisation

  Composition of trade (What we trade)

  
  

  Elaborately Transformed Manufactures (ETMs):

  Finished products that are high in value

  E.g Cars, Medicine, Computers

  
  

  Simply transformed Manufactures (STMs):

  Raw materials low in value that are in the early stage of production

  E.g Mining Resources, Sheets of steel, Chemicals, cotton

  
  

  Agriculture:

  Low value products such as wheat.

  It is what a country naturally produces
• Globalisation

  Direction of trade (Who we trade with)

  Australia trades with Asian emerging economies as they indicate growth.
• Globalisation

  Financial Flows

  
  

  Financial Flows refers to the financial transactions for loans, currency and investment.

  
  

  Composition of financial flows:

  Portfolio Investment: 10% less of a company. Provides short term wins

  
  

  Foreign Direct Investment: 10% or more of an organisation, Long term stable growth and wins
• Globalisation

  Financial Flows

  
  

  Financial Flows refers to the financial transactions for loans, currency and investment.

  
  

  Direction of financial flows (Where we send our money)

  Countries attract finance because of their relationships and proximity to nearby countries that make it easier to trade with. 
• Globalisation

  Investment and Transnational Corporations

  Investments involve putting money into projects or assets, fuelling economic growth by creating employment, fostering innovation, and contributing to wealth building in the country.

  
  

  Transnational Companies or TNC's are companies that operate in two or more countries

  TNC’s contribute to the economy as they provide:

  • Employment
  • GDP
  • Foreign Direct Investment (Investors buying 10% more of biz)
• Globalisation

  Technology, transport and communication

  
  

  Technology

  Technology - innovative devices that enhance production, efficiency, and innovation, driving economic growth and development

  
  

  Transport

  Transport - Transport is the means in which businesses and countries can trade.

  
  

  
  

  Communication

  Communication - exchange of information, ideas, and data among individuals, businesses, and governments to make informed decisions and reduce communication delays
• Globalisation

  International division of labour, migration and immigration

  
  

  International division of labour

  The allocation of different tasks to different people in different countries (International), in order to maximise specialisation and efficiency. 

  
  

  Migration

  Moving from one place to another

  
  

  Emigration

  Exit or leave

  
  

  Immigration

  Enter
• The International and Regional Business Cycles

  
  

  International Business Cycle is the changes of business stages which impact/influence the GWP.

  
  

  Regional business Cycle is the changes of business stages within regional areas only that impact the GDP for that specific region. Asia, Europe and Africa etc
• Trade, financial flows and foreign investment

  The basis of free trade - adv and disadv

  Free trade: Countries freely trading with one another without any barriers or governmental control.

  With free trade their is deregulation and free movement of trade

  DISADV

  • Deregulation removes protection resulting is scarce resources
  • Dumping (Starts with 'D' and is a reason for protection)

  ADV

  • Improved relations
  • Economic Growth
  • GDP
  • Innovation
  • QOL improve
  • Competition
• Trade, financial flows and foreign investment

  The basis of free trade

  
  

  Absolute Advantage (Produce More)

  Where both countries have the same amount of resources but one can produce more goods and services than the other.

  
  

  Comparative Advantage (More Efficient)

  Countries make efficient use of resources in production. lower opportunity cost when producing a good

  
  

  Formula for comparative adv formula

  Comparative Advantage Formula for product X = Product Y / Product X
• Trade, financial flows and foreign investment

  Role of financial organisations WTO, IMF, World Bank, OECD and United Nations

  
  

  IMF ~ To promote global financial stability by providing financial advice and assistance to countries in economic crisis

  They operate because of the domino affect, as countries are interdependent (Dependent) and influence each other

  
  

  IMF's structural adjustment program (SAP) is a policy that outlines how a country must follow advice to funds assistance from IMF. 
• Trade, financial flows and foreign investment

  Role of financial organisations WTO, IMF, World Bank, OECD and United Nations

  
  

  WTO ~ Oversee and managing the trade between different countries, resolving trade disputes and removing barriers that prevent trade.

  
  

  OVERSEE AND MANAGE TRADE BETWEEN NATIONS
• Trade, financial flows and foreign investment

  Role of financial organisations WTO, IMF, World Bank, OECD and United Nations

  
  

  World Bank ~ To provide financial assistance to developing countries reducing poverty. Helping Developing countries via loans
• Trade, financial flows and foreign investment

  Role of financial organisations WTO, IMF, World Bank, OECD and United Nations

  
  

  OECD ~ International organisation that analyses a countries data and  provides recommendations and advice for policies that helps  society.
• Trade, financial flows and foreign investment

  Role of financial organisations WTO, IMF, World Bank, OECD and United Nations

  
  

  United Nations ~ International organisation that promote and maintains peace and cooperation improving the quality of life.

  Their are 17 sustainable development goals (SDG)

  Health, Water, Poverty and education
• Influence of Government Economic Forums

  G20 and G7/G8

  
  

  Forum ~ A forum is an platform or space where people can discuss and exchange ideas, and information on various topics
• Influence of Government Economic Forums

  G20 and G7/G8

  
  

  G7 ~ G7 is a group of 7 advanced countries founded in 1975 that meet every year to align macroeconomic policies with each other to prevent economic crises and to attend to other international issues.It was originally G8 however Russia was suspended

  
  

  G7 represents 45% of world gross domestic product or GWP

  It was formerly G8 but Russia was suspended
• Influence of Government Economic Forums

  G20 and G7/G8

  
  

  G20 ~ G20 is a group of G7 and 12 other nations + the European Union founded in 1999 after the Asian financial crisis to address global economic and financial challenges (problems), promoting cooperation and peace.

  
  

  G20 represents 85% of world GDP and 75% of world trade

  G20 represents 2/3 or 66.67% of world population

  
  

  G20 contributes to the global economy (The trade flows) as it consist of emerging nations with an existing influence in the trading field. E.g China
• Trading Blocs, Monetary Unions and Free trade Agreements

  
  

  Trading Bloc ~ Trade Blocs is when a group of countries agree to trade more freely with each other. It is preferential

  E.g The European Union (27 countries) and Association of South-East Nations (ASEAN, 10 countries)
• Trading Blocs, Monetary Unions and Free trade Agreements

  
  

  Monetary Unions ~ Monetary Union is where countries share a common currency and a single market. An example is the European Union, the euro is the official currency for the members of the European Union
• Trading Blocs, Monetary Unions and Free trade Agreements

  Free Trade Agreements ~ Free Trade Agreements are formal agreements between countries to reduce trade barriers such as tariffs.

  Bilateral FTA is an FTA between two countries (preferential)

  Multilateral FTA is an FTA between 3 or more countries.

  E.g NAFTA - Northern American Free Trade Agreement

  APEC - Asian Pacific Economic Cooperation
• Protection

  Reasons for protection - Infant Industry Argument, Domestic Unemployment, dumping and defence

  
  

  Infant Industry Argument - Newly established businesses are provided with temporary protection to grow and become independent.

  
  

  Resources should be focused on profitable firms such as the mining industry. NO WASTING RESOURCES
• Protection

  Reasons for protection - Infant Industry Argument, Domestic Unemployment, dumping and defence

  
  

  Domestic Unemployment - The amount of individuals unemployed within a nation.

  
  

  Local Producers must be protected by the government so employment and jobs would be available keeping the country independent and not dependent
• Protection

  Reasons for protection - Infant Industry Argument, Domestic Unemployment, dumping and defence

  
  

  Dumping - Dumping refers to the oversupply of unwanted products that a company exports to with low prices.

  
  

  This damages domestic businesses as they have to compete with new price changes
• ProtectionReasons for protection - Infant Industry Argument, Domestic Unemployment, dumping and defence

  Defence
• Methods of Protection

  Tariffs, Subsidies, Quotas, Local content Rules and Export Incentives

  Tariff ~ A government imposed tax on imported goods.

  USA imposes 297 tariffs on China therefore consumers have to pay a tax for Chinese imports. This discourages consumers to buy imports protecting local firms

  A tariff will allow local producers to raise costs and discourage consumers from purchasing imported goods as foreign firms MUST raise their cost to cover for the tax.
• Methods of Protection

  Tariffs, Subsidies, Quotas, Local content Rules and Export Incentives

  Subsidies ~ Financial assistance provided by government to reduce cost of production

  E.g Funds, Cash Payments
• Methods of Protection Tariffs, Subsidies, Quotas, Local content Rules and Export Incentives

  Quotas ~ Refers to the maximum amount of imports for a product.

  E.g Quota of X means country can only import X amount
• Methods of Protection Tariffs, Subsidies, Quotas, Local content Rules and Export Incentives

  
  

  Local Content Rules ~ Local Content rule refers to the minimum amount of domestic resources used in the production process. Using domestic resources promotes economic growth.

  
  

  E.g Using a resource in Australia will create employment for residential people

  Canada's energy resources of wind farms, 60% of locally resources used.
• Methods of Protection Tariffs, Subsidies, Quotas, Local content Rules and Export Incentives

  Export Incentives ~ Assistance given by the government to encourage exports.

  E.g Tax cuts, Tax concessions, Grants,
• Free Trade Diagram

  Import Competing Market (World Price below Equilibrium)

  The supply and demand do not meet at world price, supply is at 200 and demand is at 600, 400 units is missing which we then import to satisfy demand.

  To calculate revenue from foreign firms, world price times amount imported

  At the equilibrium point, there is no free trade, no import or export
• Free Trade Diagram

  Export Competing Market (World Price above Equilibrium)

  The supply and demand do not meet at world price, supply is at 200 and demand is at 600, 400 units is missing means we export goods

  Price increases

  To calculate revenue from foreign firms, world price times amount imported

  At the equilibrium point, there is no free trade, no import or export
• Tariff graph

  Tariffs graph: To find local firms revenue: Price x supply

  To find foreign firms revenue: Price x amount imported to fill gap

  The tariff in the graphs is the line just above the world prie for import competing market (World price below equlibrium)
• The import graph with added tariff:

  The rectangle box in the import graph with the tariff line (World price + tariff) is the government revenue as foreign firms pay additional tax that goes to government

  To calculate: Size of tariff x quantity imported (FOR GOV REVENUE)

  Foreign Revenue: World price times imported amount (NOT TARIFF AMOUNT TIMES IMPORT)
• Quota Graph

  Just like a tariff graph, the quota refers to the amount of imports. Quota graph focuses only on quantity.