10.1 HSC Topic One The Global Economy

The focus of this study is the operation of the global economy and the impact of

globalisation on individual economies.

10Content: Economics HSC Course

10.1HSC Topic One The Global Economy

25% of indicative timeThe focus of this study is the operation of the global economy and the impact of globalisation on individual economies.

Outcomes

A student:H1demonstrates understanding of economic terms, concepts and relationships H2analyses the economic role of individuals, firms, institutions and governmentsH3explains the role of markets within the global economyH4analyses the impact of global markets on the Australian and global economiesH5discusses policy options for dealing with problems and issues in contemporary and hypothetical contexts H6analyses the impact of economic policies in theoretical and contemporary Australian contextsH7evaluates the consequences of contemporary economic problems and issues on individuals, firms and governmentsH8applies appropriate terminology, concepts and theories in contemporary and hypothetical economic contextsH9selects and organises information from a variety of sources for relevance and reliabilityH10communicates economic information, ideas and issues in appropriate formsH11applies mathematical concepts in economic contextsH12works independently and in groups to achieve appropriate goals in set timelines.

Content

Students learn to:

Examine economic issues examine the effects of globalisation on economic growth and the quality of life, levels of unemployment, rates of inflation and external stability assess the potential impact on the environment of continuing world economic developmentinvestigate the global distribution of income and wealth assess the consequences of an unequal distribution of global income and wealth discuss the effects of protectionist policies on the global economy

Apply economic skillsanalyse statistics on trade and financial flows to determine the nature and extent of global interdependenceassess the impact on the global economy of international organisations and contemporary trading bloc agreementsevaluate the impact of development strategies used in a range of contemporary and hypothetical situations.

Students learn about:

International economic integrationthe global economyGross World Productglobalisationtrade in goods and services financial flows investment and transnational corporationstechnology, transport and communication international division of labour, migration the international and regional business cycles

Trade, financial flows and foreign investmentthe basis of free trade its advantages and disadvantagesrole of international organisations WTO, IMF, World Bank, United Nations, OECDinfluence of government economic forums G20, G7/8 trading blocs, monetary unions and free trade agreementsadvantages and disadvantages of multilateral (EU, APEC, NAFTA, ASEAN) and bilateral agreements

Protectionreasons for protection infant industry argument, domestic employment, dumping, defencemethods of protection and the effects of protectionist policies on the domestic and global economy tariffs, subsidies, quotas, local content rules, export incentives

Globalisation and economic developmentdifferences between economic growth and economic developmentdistribution of income and wealthincome and quality of life indicatorsdeveloping economies, emerging economies, advanced economiesreasons for differences between nationseffects of globalisationtrade, investment and transnational corporationsenvironmental sustainabilitythe international business cycle.Case study

Undertake a case study of the influence of globalisation on an economy other than Australia, including an evaluation of the strategies used to promote economic growth and development in this economy.

Outcomes

A student:

H1 demonstrates understanding of economic terms, concepts and relationships

H2 analyses the economic role of individuals, firms, institutions and governments

H3 explains the role of markets within the global economy

H4 analyses the impact of global markets on the Australian and global economies

H5 discusses policy options for dealing with problems and issues in contemporary

and hypothetical contexts

H6 analyses the impact of economic policies in theoretical and contemporary

Australian contexts

H7 evaluates the consequences of contemporary economic problems and issues

on individuals, firms and governments

H8 applies appropriate terminology, concepts and theories in contemporary and

hypothetical economic contexts

H9 selects and organises information from a variety of sources for relevance and

reliability

H10 communicates economic information, ideas and issues in appropriate forms

H11 applies mathematical concepts in economic contexts

H12 works independently and in groups to achieve appropriate goals in set

timelines.

Content Students learn to: Examine economic issues examine the effects of globalisation on economic growth and the quality of life, levels of unemployment, rates of inflation and external stability assess the potential impact on the environment of continuing world economic development investigate the global distribution of income and wealth assess the consequences of an unequal distribution of global income and wealth discuss the effects of protectionist policies on the global economy

Apply economic skills analyse statistics on trade and financial flows to determine the nature and extent of global interdependence assess the impact on the global economy of international organisations and contemporary trading bloc agreements evaluate the impact of development strategies used in a range of contemporary and hypothetical situations.

Students learn about:

Terms:Debt reliefThe partial or total forgiveness of debt or the slowing or stopping of debt growth

Brain drainA problem in smaller advanced economies and developing countries in which the skilled and educated tend to migrate overseas in seek of more employment opportunities

Middle-income trapWhere manufacturers find themselves unable to compete with low-income countries with lower costs of labour and also with advanced economies in higher-value products

Transition of moving from resource-driven growth that is dependent on cheap labour and capital to growth based on high productivity and innovation. Requires investment in infrastructure and education

International economic integration the global economy

Post-Great Depression: a reduction in international economic links as a reaction to the fear of financial contagion. Autarky was a common government objective e.g. Nazi Germany, Maos China in the 1950sThe 1970s saw a return to globalisation Flows of goods, services and factors of production between countries on global markets Increased interdependency between nations Growth in the size and number of transnational corporations

Ceteris paribus: All things being equal

Five sector circular flow of income model:

Equilibrium: Leakages = injections S + T + M = I + G + X Disequilibrium: Leakages injections S + T + M I + G + X Leakages > injections S + T + M > I + G + X Causes a recession or contraction in overall economic activity Fall in levels of: Income Output Expenditure Employment Leakages < injections S + T + M < I + G + X Causes a boom or expansion in overall economic activity Rise in levels of: Income Output Expenditure EmploymentFlows: Real flow Flows of goods and resources Money flow Income earned by households Expenditure by households on goods and money flows

Equilibrating mechanisms: When S + T + M < I + G + X As household income increases: Households have a higher marginal propensity to save (saving in the financial sector will increase) Taxation will increase Spending on imports will increase This results in a rise in leakages until they equal injections and a higher level of equilibrium is the result When S + T + M > I + G + X As household income falls: Households have a lower marginal propensity to save (saving in the financial sector will decrease) Taxation will decrease Spending on imports will decrease This results in a fall in leakages until they equal injections and a lower level of equilibrium is the result

The circular flow of income:

Exchange rate:The price of one countrys currency expressed in terms of another countrys currency. It is the rate at which one currency can be exchanged for anotherE.g. the higher the exchange rate for one euro to one yen, the lower the relative value of the yen. The exchange rate for euros to yen may be 1.3, meaning it takes 1.3 yen to equal a euro in value.

Terms of trade:Is the quantity of imports that can be purchased through the sale of a fixed quantity of exports

Calculated by:

Is influenced by the exchange rate because a rise in the value of a countrys currency lowers the domestic prices for its imports but does not directly affect the price of the commodities it produces (its exports).

Gross World Product

Gross World Product (GWP): the sum of total output of goods and services that have been produced by all individual economies in the world over a period of time An indicator of total production in the global economy GWP growth was 2.7% for 2011 and 2.5% (est.) for 2012 The 2011 estimate was US $78.95 trillion It is indicated by Gross World Product Production is dominated by a few countries

Calculating real GDP:

E.g.YearNominal GDP ($million)Consumer Price Index (CPI)

1 (base year)700220

21000310

Calculating real GDP growth:Percentage change formula:

E.g.YearReal GDP ($million)

1600

2800

To calculate the real GDP growth from the first table, the real GDPs of both years must first be found before using the percentage change formula

globalisation

Definition: the breakdown of man-made and natural barriers to the movement of labour, investment, technology, finance and trade allowing an increase in cross-border transactions. It involves the integration between different countries and economies and the increased impact of international influences on all aspects of life and economic activity The differences between countries tend to diminish. They homogenise. Types of globalisation, resulting from liberalisation:

Liberalisation/ deregulation: a relaxation of government restrictions

Political Attempts to bring greater understanding between nations so that differences may be resolved peacefully through such organisations as the UN Political interrelations between nations are required due to closer economic integration Technological Technology allows for easier communication between nations and provides people with a global perspective Cultural Cultures spread beyond national boundaries and this brings a greater awareness of other nations. This may be referred to as multiculturalism. There is also the effect of the eroding of traditional cultures due to western-dominated globalisation, for they are influenced by western culture (Westernisation) and increasingly Asian culture (Asianisation) Global consumer cultures are emerging in which tastes are influenced by global trends e.g. heavy-metal related attire in the 1980s These are largely facilitated by the increases in communication and transport technologies. They allow greater integration between different cultures These increase both imports and exports, for foreign products are accepted into domestic markets and it allows exporters to capitalise on the trends of the world market Economic The increased movement of goods and services, investment and finance and productive resources between nations Factors driving globalisation Trade liberalisation International trade has expanded as a result of reduced tariff barriers. Although some producers oppose reduced tariffs for the protection they give, the WTO strongly supports trade liberalisation and free trade, believing that it results in the best outcome overall. International trade agreements Increased size of the market Economics of scale Globalisation allows industrialised nations such as the US and Western Europe to find new markets, especially in developing countries Economics of scale a large market allows producers to benefit from mass production and specialisation Pressure to reduce production costs Increased business concentration Globalisation has been driven by global corporatisation These multinational corporations operate in dozens of countries around the world Mergers and acquisitions have fostered this trend The power of global finance

International and economic integration Definition: The flows of trade, investment, finance, labour, ideas and technologies that occur between nations in the world The world has become integrated. Countries depend on each other Economies are closely linked

Composition of trade: the mix of goods and services that nations exchange with each other

trade in goods and services

Effects of globalisation on trade flows:Composition and valueDirection

2008 trade was 44 times larger than in 1970 (since the sharp reduction of tariffs)Trade Blocs encourage trade between members (a criticism)

GFC caused 2% fall in trade valueRegionalism: North America EU South East Asia (China, Korea, Japan + ASEAN) APEC (Pacific Rim)

Economic and social conditions have changed composition: Agricultural trade less important Minerals (e.g iron ore) and services (e.g. tourism) increased ETMs (e.g. computers increased STMs (e.g. steel) decreasedShifts in political power(America China)

BRICs and developing countries increasing in share of trade

Australia has a low trade dependency (imports + exports as a percentage of GDP) of just 37% as of 2010, though this was a rise from 28% in 1980. Due to: Geographical isolation Isolationist and protectionist policies of historical Australian governments

The GFC had a large impact on trade dependant nations. That neither Australia or its main trade partner China are trade dependant allowed them to largely avert the crisis

financial flows

Financial flows: Definition: money flows around the world for currency exchange and investment. Includes bank lending around the world Foreign exchange market (FOREX): The global market for trading of currencies Purchasing power parity (PPP): A measure of the relative power of currencies, estimating the amount of adjustment needed on the exchange rate between the two currencies in order for the exchange to be equivalent to each currencys purchasing power. It asks how much would needed to purchase the same goods and services in two countries. Money moves faster than people or goods Technology links global financial markets linking savers and borrowers Speculators: undertake short-term investments in financial assets (buy low, sell high) 95% of foreign currency transactions are related to speculation International Monetary Fund: responsible for stability of the global financial system Causes of growth in financial flows:Reduction in man-made barriersReduction in natural barriers

Financial deregulation E.g. reductions in limits on bank lending and international capital movements (Australia 1980s) E.g. introduction of a floating (flexible) exchange rate (Australia 1983) An exchange rate regime where its currency is set by the FOREX market Deregulated the bank sector resulted in the GFC however Technological improvements Electronic transaction settlement Computerised record keeping

Effects of globalisation on financial flows:Composition and valueDirection

Exponential growth in value and number of transactions Portfolio investment (bonds, derivatives, shares worth 10% of a company) has fallen as a proportion Larger proportion of a population now owns shares and other investments (superannuation, pensions, mutual funds) Finance is centred in global cities e.g. New York, London, Tokyo Trade blocs and regionalism redirect finance within regions Economic regionalism/ trade blocs: agreements between countries in the same geographic region to facilitate the free flow of goods and services Shift to investment in and by emerging economies (BRIC) Trade surpluses build pool of funds for investment (e.g. Chinese government in US government bonds)

The level and direction of global financial flows are the main determinants of exchange rates The fastest growing are interest rate, currency, equity and commodity derivatives Interest rate and currency derivatives equal over 95% of derivatives traded Only 1% of ER market transactions are payments for trade The impact of financial flows on the global market can be evidenced in the sub-prime mortgage market disaster in the USA in 2007-08, which resulted in the Global Financial Crisis International financial flows have been increasing rapidly since the 1970s: International trade has expanded at around twice Australias rate of growth in real GDP International direct investment grew at around three times the rate of real GDP growth prior to the 2000s International equity investments have grown at almost 10 times the rate of growth in real GDP Due to Australias reliance on continual financial inflows, the government must exercise a financial discipline which is the consideration of policies in global context, not just in relation to national interests. This is due to the need to respect international investor confidence and sentiments (especially if they be animal spirits) and also the political ties with other countries

investment and transnational corporations

Investment and transnational corporations: Net investment: A measurement of a companys investment in capital, found by subtracting non-cash depreciation from capital expenditures.Calculated as:

Capital widening/ deepening: an increase in capital per worker Transnational corporations (TNCs): Global companies that dominate global product and factor markets. They are often owned by people, have production facilities and sell their products in more than one county Account for 10% of GWP Boost trade, economic growth and increase interdependence between countries E.g TNCs attracted to relocate production to Chinas special economic zones (SEZs) Causes of growth in TNCs and investmentReduction in man-made barriersReduction in natural barriers

Financial deregulation and capital (money) flows Removal of trade barriers Active government encouragement of foreign investment (e.g. Chinas SEZs) Advances in technology and communication Decreases in transport costs Similar business practices Improved cultural understanding

Effects of globalisation on TNCs and investmentComposition and valueDirection

FDI flows have increased due to number and importance of TNCs 1970 FDI flows were $13 billion 2007 FDI flows were $1.8 trillion Growth in portfolio investment flows has outstripped FDI Trade blocs and regionalism redirect FDI flows Rise of emerging markets (esp. China and India) has attracted FDIs TNCs attracted to new markets to sell their products and also the growing supplies of the factors of production

Global investment flows Flows of capital refer to the flows of savings used for investment around the world The rate of expansion compared to the growth in world GDP:TradeTwice the rate

Direct investmentThree times the rate

Portfolio investmentTen times the rate

Intra-company trade: Much international trade occurs between businesses that are owned by each other Transfer pricing (prices charged in intercompany transactions) is a concern due to the opportunities for tax aversion

technology, transport and communication

Technological improvements have been the driving force behind globalisation. They have reduced the speed and cost of communication and transport which are the links between countries that facilitate globalisation Transport: Containerisation has reduced labour handling costs and transport times The improvements in aviation technologies since the 1950s have greatly increased the prevalence and importance of air transport to international transport Reduced the costs of using foreign factors of production. This has reduced the cost of inputs into the production process contributing to lower prices and higher output, resulting in higher economic growth Communication: Cost of global communications is falling due to the Internet, mobile phones It is becoming easier and less costly for business to sell globally (e.g. the internet) Improving access to information for individuals (household consumers), firms and governments However, tighter property rights (usually held by TNCs) can increase the price of technological transfer. E.g. Apples patents The international trade of ETMs increased from 33% of goods in 1976 to 54% in 1996 The demand for commodity and fuel resources is also for purposes of technological and transport improvement. China has been a large demander of these for its process of industrialisation

international division of labour, migration

Global labour flows There are 3 types of labour flow:1. Immigration2. Temporary guest workers3. Illegal immigrants Labour is not as mobile as other global flows and are thus less globalised due to: Language barriers Family and social bonds Immigration restrictions Governments show resistance towards the flows of labour across national boundaries due to the fear of: Brain drain Market flooding, resulting in unemployment for current labourers in country Terrorism fears Skills barriers Educational barriers Cultural barriers However 3% of the worlds population have migrated to work (World Bank, 2010) and this trend is increasing Migration: the movement of people between countries on a permanent or long-term basis 60% of these to advanced economies Skilled workers (e.g. finance, IT) are rewarded well Unskilled workers (e.g. manual labour) fill the jobs that native citizens do not want to do Brain drain is a problem for smaller advanced economies and developing economies in which the skilled and educated tend to migrate overseas to in seek of more employment opportunities The number of workers that work outside their country of citizenship is 1.5% of the worlds workforce There is an increased use of outsourced work to nations of lower wage costs (e.g. Telstra call centres based in India) International division of labour: The allocating of the tasks involved in the production process to different areas in the world. This results in the specialisation of the labour forces of these countries to their role in production E.g. the iPhone is designed in the USA, the components are manufactured in many countries and it is assembled in China This is an example of a global supply chain Generally, low income countries produce manufactures which are labour-intensive as opposed to capital-intensive or requiring skilled labour. These are usually STMs High income countries have the capital and facilities to train the skills to produce ETMs Labour intensive jobs are allocated to low wage countries. This results in offshoring and outsourcing The production process moves to the most efficient location (comparative advantage) Jobs move with production Causes of globalisation (internationalisation) of labour markets: Note: These causes and effects are the same as investment and TNCsReduction in man-made barriersReduction in natural barriers

Some relaxation of migration rules E.g. movement within the EU over this issue Harmony of laws and business practices Recognition of international qualifications (e.g. APEC countries) Barriers remain: political and culturalNote: These causes and effects are the same as investment and TNCs Transport is cheaper English language is common and widespread in use

Movement of labour between nations is of the types: Immigration legally approved changes in permanent residency Guest workers long term workers Refugees those with rights to seek sanctum in another country Illegal entrants

the international and regional business cycles, trade, financial flows and foreign investment

Features of the fiscal cycle: Upswings: increasing of the economic growth rate Downturns: slowing of the economic growth rate Booms: periods of rapid economic growth Recessions: negative economic growth Depression: an extended period of negative economic growth

An international year on year recession as happened in 2009 has only happened once in the last 60 years

The international business cycle Increased synchronicityi. Though timing differences still exist. This reflects the manner in which financial contagion or positive economic effects spread throughout the economy. For example, America was the first to be effected by the GFC, followed by its trade partners, lenders and borrowers Greater specialisation and lower economic barriers. Higher integration Globalisation has caused the economic performances of individual economies to become more closely tied to the international business cycle The economic strength of big economies spreads across the world Power of USA and China in driving cycle Greater volatility and deeper recessions as seen in the GFC and its consequencesComment by Chew: The first crisis to test the new world of finance showed that markets are so interconnected and so global that the poison can spread across markets and continents with terrifying speed (The Economist, Lessons from the credit crunch, October 2007) Affects world output, trade and investment flows Statistics:i. 2004 2007 world GDP averaged 5%ii. 2009 world GDP contracted by 0.6%iii. -3.2% for advanced economiesiv. 2010 4% growthv. 2011 2.7%vi. 2012 2.5%vii. Below trend, slowing slightly Factors affecting the international business cycle:

StrengtheningWeakening

Trade flowsDomestic interest rates

Investment flows and investor sentimentGovernment fiscal policies

Transnational corporationsOther domestic policies

Financial flowsExchange rates

TechnologyStructural factors

Global interest ratesRegional factors

International organisations

Regional business cycles Definition: The fluctuations in the level of economic activity in a geographical region of the economy over time Regions (e.g. South East Asia, North America, Europe) have closer internal economic relations than with the rest of the world Regional trends can vary from global trends (however can affect global trends)World GDP growth:

the basis of free trade its advantages and disadvantages

Reasons for trade liberalisation/ advantages of free trade: Greater access to a wider range of goods and services Specialisation and greater efficiency A more efficient allocation of resources (solution to the economic problem) Increased economics of scale lower costs resulting in lower prices Competition results in greater international competitiveness for domestic industries Increased living standards (increased income and material consumption) A country may not have the factor endowments to produce a particular good that it demands E.g. Australia is highly endowed with mineral resources (land), whereas its trade partner China is endowed with the labour factor of production

The basis of free trade and protection summary

Advantages of free trade/ disadvantages of protectionDisadvantages of free trade/ reasons for protection

Increased output from scarce resources Increased standard of living Better resource allocation Lower prices for consumers and businesses Greater GWP Establishing infant industries Structural unemployment (international division of labour) Negative externalities (pollution levels, exploitation of labour) Lack of diversity in the production base Unfair price cutting and dumping The potential for an increasing Current Account Deficit due to an imbalance on the BOGS

The best outcome is reached without government intervention Specialisation in areas of comparative advantage should increase GWP Exports provide income and employment Imports provide choice and improve quality of life Causes of growth in trade flows:Reduction in man-made barriersReduction in natural barriers

Reduced government protection of local industries (e.g. subsidies, tariffs, quotas). Since the 1970s there has been a sharp reduction in tariffsTransportation cheaper shipping and air travel

Emergence of the World Trade Organisation (WTO)Telecommunication: Phones, internet Reduced time lags and easier coordination Wider adoption of the English language

Trade Blocs (e.g. EU and ASEAN) and regional free trade agreements

Bilateral free trade agreements (e.g. AUSFTA)

Adam Smiths theory of absolute advantage identifies the objective of trade to be for countries to produce that which they have a comparative advantage and to import goods which they are not efficient at producing comparably. This results in a better outcome, as opposed to previous theories of trade, which sought to minimise imports (M) and maximise exports (X) which would stimulate the economy according to the 5-sector circular flow of income model however was a zero-sum game, resulting in no greater benefit overall. Absolute advantage the ability of a party to produce more of a good or service than another than competitors using the same amount of resources Comparative advantage the ability of a party to produce a good or service at a lower opportunity cost than another. This removes the problem of absolute advantage in if one country has an absolute advantage in the production of all goods and another in the production of none. Countries will then only produce that which has the lower opportunity cost

Trade scenario

ProductCocoaRiceNotes

Resources required to produce 1 unit of product

Countries

Mexico1020Comparative advantage for cocoa

China4010Comparative advantage for rice

Production and consumption without trade

Mexico105

China210

Total production1215

Total production in economy27Equivalent in the world economy to GWP

Production with specialisationSpecialisation can occur, for the two countries are trading

Mexico200

China020

Total production2020

Total production in economy40Equivalent in the world economy to GWP

Increase in production with specialisation40 27 = 13A better outcome overall

Consumption after Mexico trades 6 cocoa for 6 rice

Mexico146

China614

Increase in consumption as a result of specialisation and trade

Mexico14 10 = 46 5 = 1Both countries have benefited from the exchange

China6 2 = 314 10 = 4

Scenario 2:Table 1 Absolute Advantage:- production before specialisationWheat (units)Cloth (units)

Australia3020

China525

Total output3545

Australia has an absolute advantage in the production of wheat and China of cloth

Table 2 Production gains after specialisationWheat (units)Cloth (units)

Australia60(+30)0 (-20)

China0 (-5)50 (+25)

Total output60 (+25)(net gain)50 (+5)(net gain)

Total output has increased as a result of global trade

Scenario 3:Table 3 Comparative advantage: production before specialisationWheat (units)Cloth (units)

Australia2010

China55

Total Output2515

Australia has an absolute advantage in the production of both wheat and cloth

Table 4 Opportunity costsOpportunity cost

Country1 unit of wheat1 unit of cloth

Australia0.5 (10/20) units of cloth2 (20/10) units of wheat

China1 (5/5) units of cloth1 (5/5) units of wheat

Australia has a comparative advantage in the production of wheat since it has to give up only 0.5 units of cloth to produce an extra unit of wheat, while China must give up 1 unit of cloth to produce an extra unit of wheat. So it is more practical for Australia to specialise in the production of wheat China has a comparative advantage in the production of cloth since it only has to give up 1 unit of wheat to produce an extra unit of cloth, while Australia has to give up 2 units of wheat to produce an extra unit of cloth. Thus it is more practical for China to specialise in the production of cloth

Table 5 Production levels after specialisationWheat (units)Cloth (units)

Australia40 (+20)0 (-10)

China0 (-5)10 (+5)

Total output40 (+15) (net gain)10 (-5) (net gain)

The total output has increase when countries specialise in the production of goods and services based on comparative advantage. Note that the fall in the output of cloth is outweighed by the output of wheat.Hence: AD increases Economic growth increases Consumption increases and standards of living rise

Absolute advantageThe ability of a party to produce more of a good or service than another using the same amount of resources

Comparative advantageThe ability of a party to produce a good or service at a lower opportunity cost than another

The principle of comparative advantage can be represented using production possibility frontiers which are diagrammatic representations of the opportunity costs of producing goods for an economy

Export goods use factor endowments which are locally abundant (lower comparative advantage) Factor endowments: extent to which a country is endowed with resources such as land, labour, capital and enterprise Endow: To give an income or property to a party Corollary: import goods made from locally scarce factors

Convergence:The hypothesis that poorer economies per capita incomes will tend to grow at faster rates than those in richer economies due their ability to replicate production methods, technologies and institutions already in use by developed countries on the forefronts of these things. This results in a convergence of countries in terms of per capita income

Trade diversion:An occurrence in international economies in which trade is diverted from a more efficient exporter towards a less efficient one by the lowering of trade barriers with the less efficient one.

Economic development of the third world A controversial issue Supporters of globalisation claim that opening up trade is a way to improve the living standards of poor countries Critics believe that it is the rich countries that benefit, and the wealth gap only widens on a global scale

Effects of globalisation: Globalisation has made economies more unequal in their growth and development patterns, creating a divergence. Global income inequality, as measured by the Gini Coefficient has increased rapidly between 1980 and 2002, with the rapid trend of globalisation due to technological improvements. This trend seems to have peaked however and begun a reversal, with rapid economic growth in emerging economies, particularly the BRIC nations (Brazil, Russia, India, China)

role of international organisations WTO, IMF, World Bank, United Nations, OECD

World Trade OrganisationAn organisation that intends to supervise and liberalise international trade

International Monetary Fund (IMF)Aims to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world.

Its objectives are to promote international economic cooperation, international trade, employment and exchange rate stability

World BankOfficial goal is the reduction of poverty

Objectives are to promote foreign investment, international trade and facilitate capital investment

Provides loans to developing countries. Often they are soft loans for often they are on charitable terms of low interest and casual repayment date obligations

United Nations (UN)Humanitarian and political organisation more than an economical one. However, these fields are inextricably linked

Committed to encouraging economic development and social progress

Established the International Monetary Fund as well as other intergovernmental economic organisations

(OECD)An organisation of 34 advanced economic countries

Objectives: Stimulate economic progress and world trade Encourage democracy and the free-market economy Encourage sustainable development

It is a forum for countries to reach agreements as to how to achieve these objectives

The World Trade Organisation (WTO) Focuses on trade in goods and services Roles:1. Resolve trade disputes2. Promote reductions in protection Has enforcement powers over those who breach their trade agreements. Dissenting countries may face: Expulsion from the WTO High protection barriers on the import of their goods Has found it almost impossible to reduce trade barriers in agricultural protection especially in developed countries which see no incentive to, to benefit developing countries but not themselves Resulted in the stalling of the DOHA round of investigations due to the intransigence of advanced countries DOHA Development Round: A trade negotiation forum of the World Trade Organisation with objectives of lowering trade barriers around the world to incite an increase in global trade. These talks have stalled over a divide on major issues such as agricultural protection (for which wealthy countries like America still have formidable trade barriers) and differences between the developing and developed economies The International Monetary Fund (IMF) Focuses on maintaining international financial stability, integrating global markets and managing financial crises Attempts to get governments to focus on: Decreasing the size of their public sectors (privatisation) Deregulation Decreasing budget deficits Gets its funds through quotas from the 18 member nations USA provides 17% Developing nations provide 60% of total funds These nations have a greater share of power Countries in receipt of IMF assistance are generally required to follow stringent conditions including: Maintaining a tight fiscal and monetary regime E.g. high interest rates, budget cuts Closing insolvent banks and financial institutions Establishing strict capital adequacy standards Undertaking structural reforms such as: Reducing tariffs Eliminating monopolies Allowing direct foreign investment in the non-financial sectors Changing the value of the borrowing countrys currency. This usually involves a lowering of the currencys value Effects of IMF policies have been mixed Many South American countries have as a result had: Massive inflation Increased income inequality Increased poverty Increased unemployment Lower standards of living An example is Argentina: IMF first became significantly involved in 1991 Followed advice to fix its currency on par with the US dollar From 1991 1998 Grew at considerable levels Inflation declined However: Foreign debt grew Current account deficit grew In 1998 the country went into recession Partly due to the restrictions placed on it by the IMF on the current regime Also became constrained in its ability to use standard macroeconomic policy tools to engineer a recovery Debt burden grew to a point where it became unstable IMF provided extensive financial support as Argentina experienced a complete loss of market access, capital flight and deposit runs In response, Argentinian government imposed a partial freeze on funds in banks With Argentina no longer in compliance with the conditions of the IMF program, the IMF suspended financial assistance The country experienced severe political and social unrest and partially defaulted on its international debt obligations After abandoning its peg to the US dollar, a sharp depreciation of the peso resulted and a full-blown banking sector crisis In the trough of 2002, the economy had contracted 20% in GDP terms since the onset of recession in 1998 Argentina has made a sharp recovery since the trough in 2002 and has become economically independent of the IMF. It has fully repaid its debt to the IMF The World Bank Focuses on the economic development of Least Developed Countries (LDCs) Least developed country (LDC): a country which, according to the United Nations, exhibits among the lowest indicators of socioeconomic development and Human Development Index Human Development Index (HDI): A measure of human development, accounting for life expectancy, education and income. Makes soft loans (long repayment times, low interest rates) to LDCs The United Nations Committed to, among other things encourage economic development and social progress. Is more so a humanitarian and political organisation than an economic one, though these fields are inextricably connected Established the International Monetary Fund as well as other intergovernmental economic organisations The OECD An organisation of 34 advanced economic countries Objectives: Stimulate economic progress and world trade Encourage democracy and the free-market economy Encourage sustainable development It is a forum for countries to reach agreements as to how to achieve these objectives

Trade organisations

WTOIMFWorld BankUNOECD

Acronym stands for:World Trade OrganisationInternational Monetary FundUnited NationsOrganisation for Economic Co-operation and Development

Number of member nations15718818819334

General purpose of the organisationTo supervise and liberalise international tradeTo foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth and reduce poverty around the world

Provides loans to developing countries.

Goal is the reduction of poverty.Facilitating cooperation in international law, international security, economic development, social progress, human rights and the achievement of world peaceTo stimulate economic progress and world trade.Provides a platform to compare policy experiences seek answers to common problems, identify good practises and co-ordinate domestic and international policies of its members

How does it ensure complianceA multilateral dispute resolution process of negotiationExpulsion from the IMF for those who dont comply. This involves a cutting of any financial assistance.By passing legislation and enforcing this with peacekeeping forces voluntarily provided by member states

Main achievements Enhanced the value and quantity of trade. Eradicated trade barriers. Eased settlement of disputes by enforcing improved rules. Encouraged sustainable trade development

Major challenges Liberalising global trade in agriculture and textiles Critics say that its policies make economic crises worse because of the severity of the austerity measures it imposes Run by a small number of economically powerful countries which also provide most of the institutions funding Criticised for bureaucratic inefficiency and waste. Calls for structural reform Exclusiveness, for its membership is limited to a select few rich nations

influence of government economic forums G20, G7/8

International financial groups

G7G8G20

Number of member nations7819 + the EU

Why it was establishedThe apparent need to focus on the global economy by observing the effects of financial crises and the problems of high-income economies such as stagflation in the 1970sA reaction to the 1973 oil crisis requiring better cooperation between the worlds industrialised nations to respond to crises like this that affect them. This was an inclusion of Russia to the G7, despite that it wasnt a high-income nation. This formed new political and economic relations with Russia after the Cold WarProposed by Canadian Prime Minister Paul Martin as a forum for cooperation and consultation on matters pertaining to the international financial system after the GFC

Criteria for membershipExclusive to the leading high-income, large population, industrialised nations of the world (at the time of founding [1982])Supposedly the worlds eight largest economies, however does exclude China and BrazilEconomically strong countries plus several countries that are not permanent members are invited to participate at each summit.

This is a collection of the 20 highest producing nations. This is because it was recognised pre-GFC that the BRIC nations especially were producing a large proportion of the worlds product, but were not high-income nations or members of the G8 except Russia

In 2009 it was agreed that the G20 would replace the G8 as the main economic forum for globalized economies. This marks a greater acceptance of the importance of Asia to the global economy

trading blocs, monetary unions and free trade agreements advantages and disadvantages of multilateral (EU, APEC, NAFTA, ASEAN) and bilateral agreementsTrading bloc: a group of nations that agree to trade more freely with each other. They form a free trade agreement (FTA) with each other in order to do this

Multilateral FTAs:Trading blocPercentage of world exports 2010Current constituentsAdvantagesDisadvantages

European Union (EU) 67.3%28 European nations A monetary union. They all use the Euro currency Easier currency exchange between countries Reduced exchange rate volatility Economic convergence standards to synchronise economies before their adoption of a single currency meant that some nations could not join Many countries in the EU now have large sovereign debt problems, causing the European Sovereign Debt Crisis which threatens the stability of the entire EU as opposed to just these countries

Asia Pacific Economic Cooperation (APEC)47.3%21 Asia-Pacific countries including Australia, China, Japan, the ASEAN nations and the USA

North American Free Trade Agreement (NAFTA)12.9%USA, Canada and Mexico

Association of South East Asian Nations (ASEAN)6.9%10 Asian nations

Bilateral FTAs:

General: Advantages: Increase volumes of trade, maximising the benefits of globalisation Greater political unity and cooperation Disadvantages: Trade diversion: when members of FTAs favour trade between each other than to other nations Non-members of the FTAs lose trade opportunities The allocation of resources is distorted, because members of the block may be the sources of trade even if they are less efficient than outside members. They may be more cost-efficient merely because they dont have as many barriers to trade This is why multilateral trade agreements are favoured over bilateral agreements because they minimise the numbers of nations excluded Bilateral agreements are easier to found, due to the reduced number of compromises and political negotiations when just two parties are involved. They are less effective however

Protection reasons for protection infant industry argument, domestic employment, dumping, defence

Reasons for protection / disadvantages of free trade: Protection: a government action that is taken to give domestic producers an artificial advantage over foreign producers. The forming of trade barriers. The practise of this is called protectionism. It aims to hinder the foreign competitors of local firms or advantage local exporters to give domestic firms an advantage on the global market Infant industry argument: That nascent businesses need assistance to aid them in their establishment to deal with initial costs and problems for they do not have the economies of scale that geriatric, established businesses enjoy Nascent: Just coming into existence and beginning to display signs of future potential. Not fully developed yet Geriatric: Old However, It is hard to know which industries have potential and thus should be protected Some industries may instead of maturing, fawn off the protection. Protection should thus last only a short time. When the industry is mature, protection should be withdrawn. When to apply and withdraw this protection are hard to define however This is generally considered a valid argument for protection Protection of domestic employment: By protecting Australia from cheap foreign goods, domestic jobs are saved However, protected industries misallocate resources that are not being used by the more efficient industries offshore. This does not result in the best outcome overall (the greatest GWP) This creates political problems, for it exports unemployment to trading partners. This encourages them to also impose trade barriers (this is the effect of most forms of protection) and hence it decreases trade. This is the retaliation effect. This may increase unemployment in the long-run due to the lower economic growth as a result of lower trade In the short-term, structural unemployment may increase as a result of trade and the process of specialisation, but theoretically the theory of comparative advantage states that there should be less unemployment overall if free trade is allowed This argument may have a xenophobic basis, for fear of influxes of migrant workers Prevention of dumping: Dumping occurs when foreign businesses flood another market with their products at below cost price in order to: Dispose of a surplus Establish market control Due to the practise of dumping, local businesses often fail and unemployment results Once the local competition is eliminated, the foreign producer raises prices again Dumping is a short-term phenomenon, so duties on dumped goods can be imposed selectively in the short-term and then removed The identification of what constitutes dumping is the only problem with this policy, for it could be otherwise be used as an excuse to implement government protection This is generally considered a valid argument for protection Defence: Some nations argue that it is necessary to protect industries which are related to the defence of the country Despite that it would result in the most efficient allocation of global resources, countries do not want to rely on other countries for their defence equipment for political reasons. This is an example of a political expediency and it is an example of where political considerations trump economic principles

Also: Ethical reasons: To prevent the purchase of goods produced that exploit: The environment Labour Though there is a strong argument that cheap labour is one of the main factors that develops nations into industrialised economies, for developing countries have a comparative advantage in labour, over advanced economies for their labour is cheaper. Embargoes can prevent the import of items which are deemed unethical

One of the main political reasons for protection is nationalism which can cause xenophobia and tribalism in which other nations are secluded.

methods of protection and the effects of protectionist policies on the domestic and global economy tariffs, subsidies, quotas, local content rules, export incentives

Free trade: when a government does not attempt to influence what its citizens can buy and sell to other countries though intervention. Types of protection (usually as protection of domestic industries) Duty a tax on items purchased abroad Local content rules A requirement imposed that certain products contain a minimum percentage of domestically produced components Australia has used local content rules in the motor vehicle industry. This means that to qualify for protection for making cars in Australia, Australian car manufacturers must include a certain percentage of car components made in Australia (85%). Export incentives The government provides assistance to domestic businesses in developing their export markets Tariff a tax on imports or exports (usually imports) to or from a country. Used to give imports a disadvantage compared to local products Types: Specific tariff or import duty Imposes a fixed monetary (dollar) tax per unit of the good imported E.g. $10 per shirt Ad valorem tariff A constant percentage of the monetary value of 1 unit of the good imported is taxed E.g. A 20% tax/ tariff on imported cars

E.. Instead of societal loss should be welfare loss or deadweight loss

Imports and the effects of tariffsDomestic economy. No trade

Economy opened to global trade. Is exposed to imports at lower costs than domestically produced goods, however domestic supply shrinks from:

0Qe to 0Q1For at the world price for the product, that is how much domestic industries are willing to supply (that is where the domestic supply curve intersects the price), however at this price the demand is at Q2, and thus Q1Q2 is filled in with imports, which are happy to provide at this price.

*Sworld is horizontal as it is so vast as to be practically unlimited, and negligibly affected by demand from this economic situation. It is perfectly elastic and thus the burden of the tariff (tax) is passed onto the consumers

Before imports

Definitions:

Consumer surplus:Producer surplus:

The monetary gain obtained by consumers because they are able to purchase a product for a price that is less than the highest price that they would be willing to payThe monetary gain of a producer obtains by selling a product at a market price that is higher than the least they would be willing to sell it for

Decrease in producer surplus after imports

Increase in consumer surplus after imports

Imposition of tariff. Rise in import price

Results in rise in Producer surplus

Results in a reduction in consumer surplus (greatly outweighing the rise in producer surplus due to deadweight loss and government revenue) The government often uses this revenue on public goods to partly reimburse consumers (the public)

Results in an increase in domestic supply and decrease in imports

Loss in consumer surplus is divided between producers, the government (which collects the tariff revenue), and deadweight loss.

Also notice the reduction in domestic consumption as a result of the tariff due to higher prices

Summary:Without imports (Autarky [self-sufficiency]):With imports:With tariffs:

Subsidy financial aid paid to firms to allow them to reduce their costs of production On the graph: The price moves down (as the firms can sell their product at a lower price due to the lowered production costs) to create a new supply curve of S1

In this economy: Autarky: Equilibrium would occur at price Pe and Quantity Qe for barley Domestic producers make 0Q2 With uninhibited global free trade: Barley is imported at a lower cost than what is produced domestically. Thus domestic production falls from 0Qe to OQ1 and foreign production now occupies the supply of Q1Q2. Both accept a price of Pworld and by multiplying price x quanitity, we see domestic producers earn box a and foreign producers boxes b, c and d. With a government subsidy to domestic producers of barley: The supply curve shifts to the right (outwards) to the new supply curve of Sdomestic + subsidy. This is how much domestic firms will supply at the current price + the governments subsidy. Domestic firms receive Pworld + subsidy for their production Domestic producers supply 0Q3 at Pw+S, while foreign producers supply only Q3Q2 and earn c and d. Since domestic firms are less efficient than the foreign producers, since they require a higher price to produce Q1Q3 (the artificially augmented section of their production), box g is a deadweight loss in welfare. Domestic producers earn a, b, e and f.

Quota a maximum quantity placed on imported goods

In this economy: Autarky: Equilibrium is at Pe and Qe for sorghum Domestic producers make 0Q2 With uninhibited global free trade: Price of Sorghum is Pworld due to lower world price (comparative advantage of other economies at producing it) Domestic producers make 0Q1 and foreign producers make Q1Q2 Domestic producers earn box a Foreign producers earn boxes b, c and d With a government quota on imports of foreign sorghum: The Sdomestic supply curve shifts right to Sdomestic + quota Domestic producers produce 0Q1 and Q3Q4 and foreign producers produce Q1Q3 (the limit of the quota) Box j is a deadweight loss due to the domestic producers being less efficient than the foreign producers Domestic producers earn a, f, c, I and j and foreign producers earn b, g, h

Globalisation and economic development differences between economic growth and economic development

Economic growthEconomic development

Economic growth: the percentage change in real GDP over time Achieved by increased aggregate demand and supply in the economy Economic development: a broad measure of a nations welfare and living standards

A lack of government intervention may promote high economic growth at the expense of economic developmentExcessive government intervention may promote economic development at the expense of economic growth

The two concepts are related however in that economic growth facilitates economic development, and also vice versa due to the increased demands (AD) of economic development

Economic growth:

Growth rate mainly depends on factor endowments and technological change Population factors: Unemployment rate (the utilisation of the labour factor of production) Education (investment in human capital). This constitutes a skilled workforce An incentivised workforce Capital accumulation: investment: Capital: the produced means of production Net investment: investment towards the adding of capital to the production process Gross investment: net investment accounting for depreciation Capital widening: increases in capital to keep up with the growing workforce Maintains real GDP per capita (the level of economic growth and development) Capital deepening: increasing capital per worker Promotes higher economic growth rates Improved efficiency of resource use: Utilising unemployed resources maximises economic activity. It represents an expansion towards the production possibilities frontier Technological progress: The introduction of new technology can raise productivity Usually involves the introduction of new capital: embodied technical progress However, can be introduced in other ways e.g. education. This is disembodied technical progress Institutional factors: Factors that are specific to a particular economy Export industries: Can provide an outlet for production when there is less than adequate domestic demand

For productivity to rise, capital deepening and technological process must occurRising productivity causes economic growth and economic development

Economic growth precedes economic development so: Developing countries may grow at slow rates e.g. Jamaica which had growth rates of just 1.2% yearly averaged from 2000-2010 Emerging economies have begun their period of growth and so experience high growth rates e.g. China which has sustained levels of economic growth of around 10% for the last three decades and is only now starting to slow as it progresses into an advanced economy. Such a transition occurred in Japan in the 1950s to 1980s Advanced economies with growth rates that have stabilised, but high economic development e.g. Australia which consistently has had growth rates around 3% for the last century

Definitions: Efficiency: the degree to which the factors of production are used to their greatest extent Productivity: a measure of efficiency by finding the ratio of outputs to inputs of production

Economic development:

The impact of the performance of the economy on the population A traditional measure is real GDP per capita:

This is nominal GDP adjusted for inflation and population changes

Therefore:

Limitations: Only measures the approximate material standard of living Does not account for inequality, which may cause an unequal distribution of this real GDP to be concentrated in the hands of the few. This will not benefit the majority of the populations standards of living Standard of living: a holistic term encompassing the general quality of life of a person or population

distribution of income and wealth

Measuring income inequality: the Lorenz curve

Need to know this formula for HSC, not how to calculate it

Global trade is increasingly being dominated by TNCs which direct financial flows towards developed nations Globalisation causes a race to the bottom where countries compete to reduce regulatory standards to attract transnational corporations. Creating pressure to: Keep wage levels low Restrict union membership Deregulate. This can reduce the working conditions of workers however Generally inequality in wealth is greater than that of income in a nation The purchase of wealth requires an income high enough that a portion of it can be saved. High-income earners save more because they have the means. They have a higher marginal propensity to save (MPS). This wealth often then generates further income and the cycle continues Despite a shortage of records on wealth ownership, generally: At the end of the 20th century, most highly wealthy individuals were European, American and Japanese citizens The number of wealthy mainland Asians has grown to levels similar to those of Europeans

Global inequality: As of 2010: Advanced economies constitute just 16.3% of the global population, yet earn just 55.1% of GNI (PPP) Developing economies constitute 11.5% of the population, yet earn just 1.3% of GNI (PPP)

income and quality of life indicators Real GDP per capita: measures the average income for an individual in the economy Limitations: Doesnt account for inequality in the distribution of income Measures income but doesnt account for the actual quality of life of the people in the country Human Development Index (HDI): a holistic measure of human development, accounting for life expectancy, education and income (but this is just one factor) Limitations: doesnt account for any environmental factors of the economy. Essentially, it measures the present but not the future

developing economies, emerging economies, advanced economies

Levels of economic development

Type of economyGNI per capita cutoffs (UN, 2010)Economic growthStructure of the economy

AdvancedE.g. Australia, USA, Germany, Singapore, Korea, UK, Canada, Euro-zone$12,196 or moreSlower in recent decadesService industries and advanced manufacturing. Post-industrialised

Emerginge.g. BRICs (Brazil, Russia, India, China), Mexico, Middle East oil exporters$996 to $12,195Strong growth (5-10%)Industrialising (usually strong manufacturing)

DevelopingE.g. Bangladesh, Sub Saharah Africa, Chad, Niger, Ethiopia, Zimbabwe$995 or lessModerate growth (and high population growth)Agriculture and foreign aid

BRIC: An acronymic collective term for the emerging economies of Brazil, Russia, India and China which are estimated to overtake the G7 economies in terms of economic prosperity by 2027G7: An international finance group with containing members from the nations of France, USA, UK, Germany, Italy, Canada and Japan

Generalised features of economies of these types: Developing (though this is a broad and pollyannaish term encompassing countries that have low-incomes but are both developing and those that arent developing e.g. Pakistan is showing definite development whereas Zimbabwe is not, but they are both classed as developing economies) Low level of income Weak human resources sector Low labour productivity Limited industrial advancement High levels of absolute poverty Vast inequalities between people Dependence on agriculture Reliance on aid Unstable political environment Weak public sector and limited utilities and public goods and services Low levels of saving and investment (low MPS) Labour-intensive production processes Lack of overhead capital needed to produce ETMs. Usually produce STMs Predominantly agrarian industries If developing: Industrialisation Improving education levels Emerging Experiencing rapid changes Often in transition from socialism to capitalism Actively seeking to be part of globalisation Encouraging large amounts of FDI High economic growth as resources are utilised Industrialisation. Increased production of ETMs Increasing wages Improving qualities life (HDI indicators) Advanced High economic development High GDP High spending on services as opposed to goods. This represents a satiated society in terms of goods wants Democratic Governments Advanced / liberal economies Stable financial systems Large services sector. Post-industrialisation Some previously socialist economies which have now completely transitioned to capitalism are listed as advanced economies. An example is Russia.

The main economic problem faced by emerging nations is overcoming the middle-income trap in which rising wages make them less competitive in the global trade of the labour-intensive products that they had relied upon to elevate themselves to such a level. Their comparative advantage in making these products begins to diminish. Simultaneously, at this stage they may struggle to be competitive in those capital-intensive manufactures. Japan had to overcome this in the 1950s to 1980s China and India have recently transitioned from being developing to emerging nations and China is now in the process of becoming an emerging nation The Asian Tiger economies overcame the middle-income trap by following an export-oriented growth strategy that was pioneered by Japan

reasons for differences between nations

Causes of inequality in the global economy: Global factors: Global trade system: Wealthy countries protect their domestic agriculture sector because it is not competitive with agricultural producers in developing nations Resulted in the stalling of the WTO DOHA round Regional trade blocs exclude poorer nations Poorer nations do not have the funds to implement international agreements and lodge appeals against other countries protectionist measures Global financial architecture: FDI flows heavily favour the emerging economies (especially BRICs) which have prolific growth rates and thus high returns on investment Many developing countries have large foreign debt burdens. The IMF and World Bank provide debt relief to Heavily Indebted Poor Counties (HIPCs) Debt relief: the partial or total forgiveness of debt or the slowing or stopping of debt growth Heavily Indebted Poor Countries (HIPCs): Countries with high levels of poverty and debt elected by the IMF and World Bank for aid and debt relief Global aid and assistance: Much aid is spent by receiving countries on servicing their debt Much aid by developed nations is tied aid, which is spent on overpriced or unnecessary goods and services which are produced by the donor country Aid often reflects the considerations of the donor countries rather than the receiving country. Usually military or economic considerations Global technology flows: The difference in access to new technologies is called the digital divide Intellectual property rights restrict the benefits of technological transfer to poorer countries because they cannot pay developed country prices for those technologies Domestic factors: Economic resources the acquirement of sufficient resources for the production process: Natural resources (land): Countries gifted with abundant natural resources have better opportunities for economic development Labour supply and quality High income countries tend to have highly educated and skilled labour resources Low income nations are characterised by high population growth, poor education levels and low health standards, which reduced the quality of the labour supply Access to capital and technology Difficulty in gaining access to capital for development for poor countries Low income levels provide little opportunity for savings that can be used for investment Institutional factors Political and economic institutions: Political instability, corruption and a lack of law enforcement by government agencies undermine the confidence of investors Economic policies: How governments balance the rolls of market forces and government intervention in the economy A heavier slant towards management by market forces may result in a high level of economic growth, but not improve education, health care and quality of life Excessive government control over economic decision making can constrain the entrepreneurship and innovation, reducing economic growth but possibly increasing economic development The historical ineffectiveness of socialism as an economic system. This suffers from a lack of incentive, corruption in the economic planning authorities and also the protectionist measures involve dont allow the country to benefit from global trade. Government responses to globalisation: Policies relating to trade, financial and investment flows, transnational corporations and the countrys participation in regional and global economic organisations will influence an economies ability to take advantage of the benefits of integration such as economic restructuring, greater efficiency, access to foreign capital and technology and access to overseas goods markets

effects of globalisation trade, investment and transnational corporations environmental sustainability the international business cycle.

Case study Undertake a case study of the influence of globalisation on an economy other than Australia, including an evaluation of the strategies used to promote economic growth and development in this economy

China(Strategies used to promote economic growth and development) China is an emerging economy due to its rapid economic growth rates and increases in economic development

Market liberalisation/ deregulation/ de-centralisation Abandonment of commune system (de-collectivisation) Households can now make their own production decisions and sell surplus output in free markets once the state quota was met The dual track system Dramatic increases in food production (reducing poverty) Surplus income invested in privately run town and village enterprises (TVEs) Saying among Chinese farmers: Mao Zedong gave us liberation, Deng Xiaoping gave us food By the 1990s, central planning was obsolete in agriculture. Market forces determine the distribution and allocation of resources The private economy Prior to reform all enterprise was government-owned 1980s relaxation of restriction on private enterprise to supplement SOEs State-owned sector accounts for approximately 40% of GDP Many industries (banking, mining, power, steel making) still SOE monopolies Tariff reform reduced cost of imports and increased competition and efficiency Dengs famous maxim: It doesnt matter if a cat is black or white as long as it catches mice State owned Enterprises 1980s-90s privatisation many small SOEs are sold to the private sector Many large SOEs remain E.g. banking, mining, power, steel making, shipping Some compete with international competition (hence contradicting Chinas strategy of globalisation and attracting foreign companies) Others are monopolies (Thus not allowing any foreign companies to enter the market at all or domestic companies) SOEs are managed like private companies (corporatisation)

Globalisation/ trade liberalisation 1980: Open door policy towards foreign trade and investment Previously, China pursued an objective of achieving autarky. In 1974, trade in goods and services was just 6% of GDP Special Economic Zones (SEZs) established to attract foreign investment and MNCs through incentives such as lower tax rates, exemption from import duties, cheap labour and power and less stringent government regulations Increased inflows of foreign capital, transfers of Western technology and management skills Foreign Direct Investment and Special Economic Zones 1980: Open door policy Coastal development strategy to take advantage of Port infrastructure and trade routes Labour supply Access to technology SEZs facilitate trade and attract foreign investment Are used (unofficially) as a model for the Asian Tiger economies More adaptive and flexible government policies Tax incentives for investment Less restrictions on foreign investment Rural-urban migration (movement permits) Movement is still very much restricted though and the Household Responsibility Scheme remains

China was transitioning to a system of market socialism Profiteering activity within an economy that is still dominated by the public sector

Reduction of trade barriers (trade liberalisation) 1990s cuts to tariffs and other forms of protection WTO member as of 2001 Encourages greater efficiency due to direct competition Attracts foreign investment Opens domestic market to foreign competition SOEs still hamper foreign prospects of development in China

Consequentially:

Industrialisation

Urbanisation

Other policies: GDP During the trough of the GFC in 2008-09, the governments top priority was to maintain its growth target rate of 8% In 2008 it approved a US$586b stimulus package 2009-10 to counter the economic slowdown, boost domestic demand and prevent a rise in poverty China has employed a strategy of pump priming (stimulating) the economy to maintain high levels of GDP growth Instituted an easing of monetary policy (an expansionary monetary stance) in response to the economic slowdown by cutting interest rates and the reserve requirements on Chinese commercial banks Therefore: Lower interest rates make borrowing more attractive and encourage investment and consumption (C > S) Due to the reduction in the reserve requirements for banks: Banks have the ability to lend more money (as they are not obliged to hold as much), this increases lending Unemployment Has been pump priming economy for the last decade to keep GDP growth at around 8% This level is needed to keep unemployment from rising too fast The labour market The Household Responsibility System restricts the freedom of the movement of people around China Particularly affects rural peasants wanting to migrate to urban areas in search of employment, higher incomes and better living standards Inefficient use of labour resources as its allocation is not responsive to the forces of demand and supply in the labour market Problems: Lack of well-defined occupational health and safety regulations exposes workers to health risks Exploitation of workers by employers through underpayment or non-payment of wages Also many cases of child labour Taxation reforms 1994: Tax collection responsibility shifted from provincial governments to the central government in Beijing More efficient collection Reduced tax evasion (a major problem) Raising finance for central government infrastructure spending and the reallocation of resources to reduce income inequality. Rising income inequality is a major problem for emerging economies due to the effect of economic growth in distributing income growth in an uneven fashion. Chinas ageing population will also be a growing drain on welfare payments in the future due to the increase in aged care and medical payments Financial system reforms Banks previously run by government departments Banking laws introduced in 1995 to develop network banking More efficient flow of funds from savers to borrowers SOE banks still dominate (98% of banks) Stock exchanges establishedEffectiveness of government strategies and future policy challenges:Comment by Chew: Future policy challengesPolitical and social stabilityInequalityInflationProperty market speculationUnemploymentEconomic growth and productivityAgriculture and property rightsState Owned EnterprisesLabour market reformAging populationIncreasing consumptionExchange rateThe environment Government policy implications Key successes Trade and investment reforms resulted in dramatic increase in economic growth Economic development and reduction of absolute poverty Labour productivity growth 8.8%pa (2008-2010) and the general utilisation of Chinas factors of production (labour being a major one due to China having the worlds largest population, exceeding 1 billion) Future challenges Rebalancing the economy towards domestic consumption Due to the rising middle-class of the developing China, the domestic market will increasingly be a source of demand, and hence economic growth (aggregate demand) Creating a more equitable distribution of income Income inequality may become a problem if it rises due to the prolific growth rates Becoming more environmentally sustainable Environmental sustainability is another economic issue that is diametrically opposed to growth. Industrialisation generally has very negative effects on the environment, however as China progresses to a developed economy, the emergence of the services sector and other high-tech clean industries may decrease the environmental impact Further reducing the size of the public sector, for this has the effect of crowding out the private sector from its expansion into these areas. Public banks for example still dominate 98% of this sector. The reduction in this dominance will allow public banks to inhabit this market

Recently: The one child policy has restricted the growth in the labour force Wage rates are rising as the demand for labour grows (an average of 20% per annum) Rapid growth in the inequality of income 0.47 in 2012 Excessive spending on investment residential properties which could eventually result in busting of this housing bubble Expansionary macroeconomic policy to reduce and largely avoid the economic slowdown in the GFC China is being affected by the slowing of the growth in its export markets. These are the high-income countries that were more highly impacted and are still recovering from the GFC e.g. the US and Europe

Timeline: Agricultural reforms (1978-1994) Abandonment of the commune system of agriculture (de-collectivisation) Replaced with the Household Responsibility System Households can make their own production decisions and sell surplus output in free markets once the state quota is met. This is a policy of incentivisation Resulted in: Dramatic increases In food production Surplus income was invested in privately run Town and Village Enterprises (TVEs). This further raised output Open-door policy (1980) Towards foreign trade and investment Special Economic Zones (SEZs) established Attracted foreign investment and TNCs through market-liberalist policies such as: Lower tax rates Exemption from import duties Less stringent government regulations Inflows of foreign capital increased Chinas access to export markets, transfers of Western technology and management skills, creating substantial employment in Chinas manufacturing sector Cuts to tariffs and other forms of protection (1992) Encourage greater domestic efficiency through import competition, exposing domestic businesses to the global market Chinas average tariff rate was cut from 32% to 19% in 1996 and reduced to 15% in 2000. This represents a decrease in protectionism and a flouting of Chinas Maoist policy of economic isolationism Taxation reforms (1994) Shifted the power to collect taxes away from provincial governments to the central government in Beijing in order to improve the efficiency of tax collection and finance infrastructure spending Also targeted tax evasion which was a major problem encountered in raising significant government revenue Banking laws (1995) Develop a system of network banking Establish stock exchanges. This represents a liberalisation of the financial market Promote a more efficient capital market to facilitate saving and investment in China