Topic 1 The Global Economy Features of the global Econo my Nature of the global economy and globalisation World

d Economy: the sum of all countries in the world engaging in economic activity. The total amount of goods services and resources exchanged throughout the world. Globalisation: refers to a process of integration of national economies into the global economy through trade, investment and the reduction of artificial barriers to trade and investment. The term globalisation covers: Increase in the trade of goods and services beyond national boundaries Increase in the movements of capital, labour and technology between nations Increase in interdependency between economies Growth in the size and number of TNCs Need for more intergovernmental consultations and agreements Increasing environmental damage Gross World Product The total market value of all goods and services produced by all countries over a giver time period Statistics $US 27.5 trillion (1990) - $US 69.7 Trillion (2009) shows an increase in world economic growth the advanced industrial economies (29 0f them) accounted fro US$30,393b or 54.6% of GDP in 2004, yet had only 15.3% of the worlds population in 2003 Over half the worlds production occurs in five nations: USA, China, India, Germany, Japan Aspects of Globalisation Economic Integration: occurs when trade barriers are reduced or removed between countries to facilitate growth in free international trade and investment flows. 1. Trade 2. Investment and Technology 3. Finance 4. Labour Trade The growth in global markets is shown by the growth in the trade of goods and services between nations higher world output Trade increases $US 8.7 trillion (1990) - $US 29.2 trillion (2007), halted by the GFC, IMF forecasted negative growth of -1.5% in 2009 Increased intra-firm trade to utilise comparative advantage and economies of scale High income Countries have 70.1% of the world exports, while middle income countries have 28.2% and low income have only 1.7%. The reason for this imbalance is that developed countries have seized the opportunities of economic and technological globalisation, which has increased their share of exports Trade dependency Measure of growth in global markets the importance of exports and imports compared with the value of the nations production. 38 nations have very high dependency. Trade totals at least 80% of the value of goods produced in the economy

Hong Kong trade dependency of goods of 295% in 2003 (was 128% in 1980) These very high trade dependency economies are scattered around the world suggesting high level of trade flows throughout the world Investment and Technology 1. Foreign Investment Foreign Direct Investment is where companies establish or buy a controlling interest in a foreign subsidy $US 330 billion (1995) - $US 1.35 Trillion (2006) Foreign portfolio investment is where equity and debt securities are acquired Purchasing ownership rights to foreign assts without gaining any significant control over the use of these assets The growth of FDI and FPI has been due to the easing of capital controls between countries as the process of financial deregulation has spread globally Financial deregulation greater role for market forces to allocate financial and investment resources Easing capital controls raised competition in financial markets. More efficient link of net savers and borrowers and more diversified product lines
2.

Technology Technology has reduced the cost of conducting international business New technologies have increased productivity of labour and capital Structural changes to the way goods and services are produced and distributed Electronic commerce benefits 1. Instantaneous ordering of stock. Therefore respond to changes in demand quickly 2. Information technology used to maintain inventories more efficiency. Therefore reducing costs 3. New products have increased the range of choice. This increases competition and reduces the price of the good. 4. Reduce labour costs in marketing and distributing through the internet and electronic commerce 5. Reduced the rate of wholesalers and middlemen in distribution. Therefore increases profit. 6. Faster rate of innovation in product development

High technology exports account for 20-30% of all manufactured exports from China. Technology Diffusion: extent to which high technology products are exported Transnational Corporations: establish subsidiaries in other nations in order to establish production facilities offshore minimise costs The factor driving development of global webs is minimisation of costs and economies of scale Manufacturing plants and high technology export products located in countries with low labour costs and low taxes e.g. China. Once manufactured these components are distributed by TNCs High technology products are customised to meet the preferences of consumers in different markets Finance

Financial Crisis falls in financial activity in world financial markets. Due to risk aversion of lenders. Up until 2008, the bulk of trading was in debt securities, bonds and notes. Long term growth in the global derivatives trading e.g. futures, options and swaps; due to its use as a risk management strategy as derivatives trading is used as part of standard corporate management techniques. Process of deregulation in Australia: 1. Float of Australian dollar in world market 2. More banking licenses to foreign banks 3. Relaxation of interest rate requirements on deposits and lending 4. Growth of long term and short term debt markets 5. Increased access to Australian capital markets from overseas This increases the competitiveness of the Australian economy with international economies. It also makes it more easily accessible to overseas institutions. It increases the flow of funds entering and exiting the market, which facilitates trade. Globalisation and Labour Movement of Labour Maimise Opportunity rich make more money, poor better opportunities: developing nations to developed nations Immigration and emigration Legally approved change in permanent residency for economic, personal and humanitarian reasons Favour peple with high skill levels e.g. IT and medicine Temporary of guest workers Lower skill workers Illegal entrants Those who overstay visas withought the approval of government authorities Foreign workers made a substantial contribution to the balance of payments of their home countries by remitting savings from their salaries. Problems associated with the international migration of workers Workers from developing countries are exploited Black market of migrant workers to work in illegal industries e.g. prostitution Growing need for developed countries to increases their labour supply due to an ageing population Flood of illegal refugees from developing nations to developed seeking employment Highly skilled workers leaving developed and developing countries to seek employment and higher incomes in other rich industrial countries.
Global

The International Business Cycle Major phases of the business cycle 1. Expansion- upturn in demand, fall in inventories, increased demand for resources including labour and new investment in plant and equipment e.g. 2003-2005 global resources boom 2. Peak supply or capacity constraints, where inflation starts to rise and the growth in global output is no longer sustainable e.g. 2006 and 2007 global growth peaked 3. Downswing falling demand ad output and rising rates of unemployment as global economic activity slows e.g. 1997-98 Asian Financial Crisis

Trough or Recession fall in global output and demand reach their minimum point e.g. IMFs forecast for a world recession in 2009. Globalisation and economic integration between countries have meant that the economic performance of individual countries is closely linked to the international business cycle E.g. global resources boom between 2004 and 2007, led to rising demand for raw markets and capital from fast growing economies. This upturn in commodity prices led to rising commodity prices and higher world growth of 5% between 2005 and 2007. Deteriorate of global outlook in late 2007 due to the collapse of sub-prime mortgages in the USA, has led to a serious crisis in the global financial system. This is evident by the rising cost of credit and the falling asset prices. Slowdown in world economic growth to 3.2% in 2008 Most industrial economies experienced contractions in output, with some advanced countries forecasting a deep recession. The world economy entering a boom Decrease in protection and tariffs by countries Increase In Aggregate Demand through an increase in consumption and investment Increase in the supply of technology Increase in government expenditure and deficit spending Increase confidence for jobs and profit Globalisation Development of FDI and FPI, through the emergence of countries such as China The World economy entering a recession Decrease In foreign investment Increase in tariffs e.g. US tyres Rise in oil prices cost push inflation Rise in commodity prices, coal and food Lower aggregate demand Structural Change changes in the nature and composition of production 1. Market based changes e.g. technology, demographical changes, change in tastes and preferences, increase growth through globalisation 2. Government induced changes e.g. tax, reduction in tariffs.
4.

Trade and Financial Flows World Trade and Financial Flows Increased economic integration between countries have increased economic links between economies, therefore increased world trade As global integration proceeds, developing nations expand their share of the global economy e.g. China Globalisation of world trade global market place Reasons for integration of trade and world economies Financial deregulation and floating exchange rates Increased mobility of capital. Trade surplus companies (China) export capital to trade deficit countries (USA) Decrease in trade barriers through trade agreements increase in trade flows Trade in ETMs has grown rapidly, due to less protection An increase in specialisation and exchange in ETMs and services

Collapse of communism increased demand for capital integration through trade and investment Trade linked with investment as companies used FDI to access foreign markets Regional economic integration formation of trade agreements Intra regional trade (NAFTA) trade linked to FDI Foreign Exchange Market Needed so that Australian dollar funds can be exchanged into currency of choice Daily turnover increase $US 1. Trillion (2001) - $US 3 Trillion (2007). Currency becomes an asset Participants of Foreign Exchange Markets The normal buyers and sellers who want to exchange some of their own finds These will be exporters, importers, tourists, firms moving funds dor direct and portfolio investment purposes and governments wither paying or imports or borrowing and repaying loans Intermediaries Providing services to their customers Trading in foreign currency Profit motivated Speculators Anticipate movements in exchange rates to make a profit Non- financial Institutions Governments, IMF, UN Impact of Changes in trade and financial flows in economies Trade flows Exports are an injection into the circular flow Increased X (exports) is a component of Aggregate Demand, raises total sales of firms which encourages increased output increased GDP Increased GDP will require more factors of production to be employed in production. Household income (Y) will rise and encourage more consumption spending (c), more savings (s) and more taxation revenue being available to the government Imports are leakages from circular glow Income and resources are directed out of the economy Positively Consumers have access to a wider range of goods and services at a lower price increased living standards Put pressure on local firms to become efficient Provide access to better technology If world growth exceeds a countrys domestic rate of growth, with exports increasing faster than imports, its balance of payments on current account should improve and move into surplus.

Financial Flows Foreign savings add to local savings needed to finance investment expenditure. Raised investment production of goods and services in the future Change in world financial flows 0> change sin domestic flows Foreign direct investment new technology raises efficiency of the use of factors of production

However Australian savings may be attracted abroad leaving a shortage of savings High foreign savings may see panic outflow, such as the 1998 Asian financial crisis Collapse in the value of their currencies, sharp rise in unemployment, inflation, falling wealth through stock market and real estate values External Shocks transmitted to domestic economies. Real shocks The changes in real variables such as world output, commodity prices or technological change. This can cause structural changes to occur in the real economy E.g. negative shocks such as the world oil crisis in 1973 and 1979, which led to a world wide recession E.g. Positive real shocks include the world economy between 2004 and 2007, global resource boon lifted growth above 5% Financial or monetary shocks Refer to changes in financial variables such as international share prises, a rise in international interest rates or inflation rates E.g. the Asian currency crisis in 1997 due to a rapid withdrawal of capital. Case Study 1 Asian Recession 1997 Due to: a lack of international controls over capital markets, which led to destabilising speculation and volatility of shirt term capital flows, which led to financial congestion Asian currencies e.g. Indonesian rupiah fell dramatically, die to poor lending policies of many Asian banks and a lack o prudential supervision Asian Crisis was transmitted around the Asian region, a collapse in one country was transmitted to its trading partners Case Study 2 US recession in 2001 and the Iraq War in 2003 A collapse in the price of technology, led to a loss of confidence, which caused a slowdown in all major regions September 11 caused a further slowdown in activity, the US federal reserve cut interest rates to ensure liquidity and to restore consumer confidence Iraq war caused further shocks to the US economy. It meant an increase in the US budget deficit and political uncertainty. Case Study 3 Higher World Oil prices in 2005-2006 World oil prices increased, reflecting the depreciation of the US dollar The rise in world oil prices can be traced back to global supply and demand factors, demand for oil increased because of strong economic activity Much of the increased demand is from China, which accounts for 1.4. Million barrels per day Short term threats to oil supply in 2005/0g included Iraq war and Saudi Arabia terrorism Financial difficulties for Russias largest oil company Oil Prices reached over US$140 in 2008 Case Study 4 Global Resources boom 2004-07 Higher output growth of 5% p.a. Resources boom resulted in stronger demand fro resources higher rates of capital utilisation and a fall in unemployment Expansion was based across all regions with rapid growth in China Australia as a commodity exporter benefited greatly from the global resources boom. The value of resource exports grew, and accounted fro 46.5% of total exports, this increase in demand was due to development in china

Case Study 5 US Sub-Prime, Global Credit and Financial Crisis 2007-09 Collapse of sub-prime mortgage market, sub-prime loans by banks provided those with lower credit rating mortgages (high risk) Collapse caused asset prices for shares and bonds to fall and there was an increase in interest rates. The US Federal Reserve injected liquidity into cash markets to restore confidence. Banks withdrew funding to high leveraged investors, which triggered forced asset sales US fiscal stimulus package of US$146b to support household spending and business investment In December 2008, the financial crisis led to an unprecedented and synchronised global contraction in output, trade and capital flows as the USA financial markets are linked to the US export market. In December 2008, the contraction on GDP was -6.35% Transmission of GFC- the GFC transmitted into a recession as it moved from the financial sector to the real economy, affecting confidence. The GFC has required co-ordinated policy responses and the use of fiscal stimulus packages to support aggregate demand. The increasing extent of the global financial crisis is due to the increasing extent of the financial and trade linkages between advanced and emerging economies. Free Trade and Protection The Basis of free trade Specialisation: producing what you sell the best and then trading the surplus Factor Endowment (resource endowment) The ability to trade due to countries differing in the quantity and quality of resources available If some goods do not meet the needs of the country, it will have to trade with other countries who want what it has got and have what it wants Determined by the supply of natural resources, labour, capital and enterprise Absolute Advantage A situation where a country with a given level of resources can produce more output than another country with the same level of resources Improves efficiency and productivity Increased economies of scale Increase in incomes and consumer satisfaction asHigher incomes - higher living standards Comparative Advantage Even if one country has an absolute advantage in producing all goods over another country, each country will gain from trade provided each specialises in the production and export of the good in which it has the lowest opportunity cost. Opportunity cost = amount of the good forgone over the amount of the good produced The Advantages of Free Trade economic benefits structural change Benefits of free trade come down to their factor endowments Intense competition sends price signals to industry Industry thrives or wilts upon its relative productivity The Economy specialises in the factors of production according to absolute and comparative advantage.

1. Increased Output from scarce resources In general a country has a comparative advantage in producing a good because of its endowment of natural resources, so free trade will maximise the output of those goods Resources and Income are allocated into these sectors of the economy, which have the lowest opportunity cost, and in this way, the economy raises allocative efficiency As output increases, income and GDP increases consumption increases (consumer more of the goods we do not produce by importing them) and Savings increase 2. Increased Specialisation Economies of scale and savings of size e.g. mass production techniques and bulk buying Improves technical and allocative efficiency (more is produced for a lower cost) Reduces cost of buying 2. Increased Productivity Optimal allocation of resources Increases allocative efficiency (allocating resources to their best alternative to minimise opportunity cost 3. Increased Competition Lower prices, due to price competition Higher real incomes increase in purchasing power as they have greater income to spend, more wants are satisfied, increases standard of living 4. Greater incentive for innovation Increases dynamic efficiency (adopting technology)

Disadvantages of Free trade 1. Infant industries newly established firms find it difficult to compete 2. Unemployment Job displacement in uncompetitive industries can lead to structural unemployment and more regional inequality 3. Negative Externalities Free trade can lead to negative externalities if firms do not pay for the unintended consequences of their production activities such as higher levels of pollution and environmental degradation 4. Dumping Free trade may lead to unfair price cutting of exports sold at below the domestic price in foreign markets. 5. Current Account deficit A country pursuing free trade can often experience an ongoing current account deficit in the balance of payments if it is unable to finance its import expenditure with export income Reasons for protection 1. The infant industry Argument New industries have high fixed and variable costs, which means that they have to charge a higher price and are uncompetitive, without the protection the industry cant grow

Some industries in a country could develop a comparative advantage If only they could be sheltered from foreign competition for a little while However Industry becomes built up behind protection Protection may become permanent 2. Protect Domestic Employment Argument Importing goods exports jobs, tariffs protect import competing industries, which increases their share of production and employment In the short term reduction in protection increased structural unemployment; expenditure and extensive restructuring would be required In the long term - reduction in protection creating more jobs. Resources are diverted towards efficiency uses 3. Protection against the dumping of imports Refers to selling a product in a foreign market at a price below its cost of production, Can cause problems in the importing country of unemployment Income, resources and employment may reallocate overseas because they are unable to compete against cheaper imports 4. Military Self- Sufficiency Argument Certain industries are considered essential to nation defence and that Australia should diversify its production into these areas in casse of war Includes shipbuilding, aircraft and communications Economically requires diversion of resources in inefficient industries 5. Reducing a balance of payments deficit Australia has a large current account deficit and foreign debt and can use tariffs to reduce import spending and switch to expenditure on domestic goods. Decreases specialisation and due to comparative advantage, misallocation of resources to less efficient industries increases prices and reduces competition

Methods of Protection and the effects of protectionist policies on the domestic and global economy Tariffs: Taxes placed on goods produced in other nations Free Trade Position This means that demand will fall No trade price World price

Q1

Q2

Effects of Price Falling Because of a lower world price, domestic producers supply Q1 The consumers want Q2 Importers are supplying Q1-Q2 Effects of a Tariff Revenue earned by government Gain in producer surplus Loss in consumer surplus No trade price World price D S Protection effect Consumption effect Q1 Q2

Q3

Q4

Tariff is a trade protection measure, which provides an artificial advantage to domestic producers regressive tax on imported goods, raises price of imports makes import goods price uncompetitive Impact on Consumers Increase in price paying more for less output Loss in consumer surplus Contraction in consumption Impact on foreign producers Tariff increased price on imports Contraction in market share and sale revenue Selling less for the same price Impact on protected domestic producers Increased retail price of imports increased price competitiveness of inefficient producers increased production Increase in production output and revenue larger market share Increased output increased demand increased resource price increased costs of production of unprotected industry decreasing international competitiveness Less efficient production Reallocation of resources towards less efficient industries reduces the competitiveness of previously efficient industries

Decrease in technical and dynamic efficiency as there is no incentive for innovation Impact on government Increased revenue from tariffs, incomes and employment Retaliation by trading partners Reduce the process of globalisation Effects 1. Income redistribution effect: incomes are taken from overseas producers and directed to domestic 2. Reallocation of resources effect: L, L, C & E is reallocated from overseas producers to domestic producers 3. The revenue effect: Revenue (tax x quantity of imports) that flows to the government Example decrease in Tariffs Reduction in Car Tariffs from 10-5% in 2010 decrease in price of imported cars Reallocation of resources domestic resources reallocated on the basis of opportunity cost Microeconomic reform of the motor vehicle industry Losers are those that previously had free trade agreements and governments who lose revenue Decrease in tariffs greater access to world markets for importers greater consumer sovereignty Structural change Becoming more efficient and increases productivity

Subsidies: cash payments made to local producers to encourage supply in the face of import competition S S1 Price World Price D B A

Q1

Q2

Q3

At the world price domestic supply is Q1 and domestic demand is Q3, therefore Q1 to Q3 is being imported Subsidies reduce the net cost of production therefore increasing supply Domestic producers are more willing to supply more output at that price

Decreases imports and increases domestic production Consumers: pay less for more output Government: taxpayer revenue allocated to small sectors of the economy, encouraging inefficient resources and long run inefficiency Business: income and resources are restored yet misallocated Advantages of Subsidies 1. Growing populations will demand more agricultural commodities subsidies increase supply to meet the increased demand 2. Guarantee high quality standards resources allocated to where the government wants 3. Self Sufficient internal production meets demand Disadvantages of Subsidies

Creates an oversupply demand doesnt necessarily meet the increased supply misallocation of resources and allocative inefficiency 2. Does not mean better quality 3. An increase in deficit the government loses out by having to pay for subsidies Subsidies are preferred to tariffs it is a redistribution of income (income is distributed from areas with subsidies to areas without.) It is part of government expenditure and can be annually reviewed Consumers receive the same quantity at the same price A tariff is a regressive tax while a subsidy is paid out of government revenue collected from a progressive tax system more equitable Examples of subsidies EU - Common Agricultural Policy subsidies that represent 48% of the EUs budget, France receives 10.9 billion Euros in subsidies
1.

Quotas supply side form of protection Quota physical limit on the number of units that can be imported from overseas; decrease in quota increase in protection Example: there is a 123, 000 unit quota on the number of 4WD that can be imported into Australia per year S D Q2 P1 Price P2 Decrease in quota Increase in quota Q Q1

Effects of a quota If a quota is reduced, the price of the good increases greater level of domestic production Increased Quota, Decrease in price lower levels of protection on domestic industry Decrease in Quota Winners and losers Consumer have to pay a higher price decreased consumer surplus Reduces efficiency in domestic industry as there is little competition Importers are unable to import foods Less competition, domestic producers able to supply more Other Forms of Protection 1. Voluntary Export restraints whereby foreign producers agree to voluntarily restrict the quantity of imports, to say, 10% of total expected sales in the market. This is achieved by threatening very high tariffs or very low quotas 2. Export Incentives tax concessions if producers achieve certain export volumes reduce the cost of production e.g. US agricultural exports 3. Local Content rules Whereby local firms are given access to lower reduced tariffs on imports of raw materials or parts provided local materials make up, say 85% of their total material costs
4. 5. 6.

7. 8.

Bounties cash payments to producers, paid on a per unit basis e.g. farmers may receive a bounty of $50 for each tonne of wheat produced Import and Export licenses the government can deny a license to prevent imports or exports, e.g. wine and branding association Technical specification where the government imposes certain minimal technical standards on imported goods. Importers must comply with safety, health, quality standards Quarantine regulations can restrict imports by enforcing health and agricultural regulations on importers of vegetable, plant and animal products Landing Charges government can import charges to bring goods into the country

Effects of Protectionist Polices Reduced allocative efficiency Consumer demand is distorted by protection, as prices reflect both protection and the marginal utility of consumers, not marginal utility alone. Resources built up behind protection Reduced international economic efficiency Skewed import demands creates less efficient international allocation of resources Loss of Productive efficiency Productivity is maximised when long run average cost is minimised, protection encourages nation based production increased costs Low technical efficiency Resources allocated to industries with low capital and labour utilisation Inability to achieve economies of scale

Reduced Consumer Surplus Protection increases prices Dynamic efficiency Restricts structural flexibility, less able to respond to price changes on international markets because producers are focussed on domestic markets Less willing to innovate Inflation Absolute increase in the general level of prices and relative inflation affects interest and exchange rates Employment Inefficient industry has a domestic focus with low capital and labour utilisation Limits economic growth and employment opportunities

Contemporary trading blocs and agreements Multilateral between many countries not necessarily in the same geographic region e.g. WTO and IMF Regional between countries in a region e.g, EU, APEC Bilateral Between two countries e.g. ANZCERTA Main Forms of Economic Integration A free Trade Area a group of member countries abolish trade restrictions between themselves but retain restrictions against non member countries A customs union where member countries abolish trade restrictions between themselves and adopt a common set of trade restrictions against non member countries A common market features of a customs union an also allows free mobility of labour and capital within the common markets countries A monetary union has the features of a common market and uses a common currency and the co-ordination of monetary policy through a single central bank Roles of Trading Blocs Can expand the benefits of specialisation beyond national boundaries by reducing or eliminating barriers to trade Increase in trade leads to Wider choice of products More competition encouraging allocative, economic and dynamic efficiency Access to local export markets Globalisation Factors or production (capital, enterprise and labour) move from one countrys market to anothers Leads to Wider access to economic growth opportunities Fewer restrictions on the best use off resources Increasing economic development, income distribution, decreasing poverty and literacy issues (link economic growth development) Trading blocs with a small number of nations can usually finalise negotiations on trade matters more easily than a hundred plus nations

Trade diversion Occurs when non-members of the bloc lose export opportunities to less efficient nations that are members of the bloc Trade Agreements Asia Pacific Economic Co-operation APEC Regional agreement 21 countries e.g. Aus, NZ, China Established 1989 Aim: Enhance economic growth and prospects Develop mechanisms for closer trade Recent Developments: in 2007 signed the Sydney Declaration on Climate Change, Energy Security and Clean Development The European Union EU Regional agreement and monetary union 27 countries e.g. Austria, UK, Poland Established in 1993 Aim Promote peace and security Uphold the values of Europeans Recent Developments: single currency established Preserves comparative advantage and strengthens economic linkages Australia New Zealand Closer Economic Trade Agreement ANZCERTA Bilateral agreement Countries involved: Australia and NZ Established in 1983 Aim Strengthen the economic relationship Develop closer economic relations Eliminate trade barriers Fair competition trade Recent Developments: Close collaboration in quarantine, customs transport and business law North American Free Trade Agreement NAFTA Regional Trade Agreement free trade area 3 Countries, US, Canada, Mexico US and Canada use Mexican labour. Mexico accesses high income export markets Enhancement of comparative advantage Association of South East Nations ASEAN Formed in 2003 Free trade agreement Promotes comparative advantage, specialisation and economies of scale International Organisations Affecting Trade General: Promote policy co-ordination amongst countries Attempt to provide rules for trade and investment transactions Forum for the discussion of trade related issues and disputes World Trade Organisation WTO Multilateral agreement 153 countries involved

Established 1995 Aim Rules based trading framework Non discrimination Trade Liberalisation - role of price flows of goods and services and free market fostering allocative efficiency, production and productivity increases and comparative advantage through specialisation. Trade disputes Recent Developments Cut agricultural protection by 30% between 1994 and 2001 Trade Round Negotiations Uruguay: Scaled back EU/US farming subsidies by 36% in 2000 DOHA: Further reductions in agricultural protection Trade concessions from developed countries to developing countries to give them more market access for their agricultural and manufacturing exports Measures to allow environmental and labour standards to be imposed o trade related activities In 2006 DOHA trade round collapsed Cairns Group: pushing at Doha rounds for reduction in subsidies. Agricultural barriers cost Australia $US 1.5 billion a year International Monetary Fund IMF Multilateral Agreement maintains financial stability for the promotion of international trade 186 countries involved Established 1944 Aim Facilitate a multilateral payments system Create stable and fixed exchange rates Remove foreign exchange restrictions Recent Developments: provided financial assistance for natural disaster relief in Sri Lanka in 2005 World Bank Evolved from the International Bank for Reconstruction and Development in 1944 Focuses on development assistance for developing and transition economies Reconstruction assistance for natural disasters Humanitarian relief for post conflict rehabilitation Social Infrastructure projects in the poorest developing countries Millennium Goals: provide a climate for growth Criticisms of International Governance Criticisms of WTO Completion of the development round seems unlikely Inequality in Global Trade dye to subsidies slows down the globalisation process Doha Round April 2006 deadline passed without resolution The WTO has been ineffective in enforcing compliance among powerful nations

Dispute resolution not living up to promise Process is lengthy and only wealthy countries can afford it The WTO has double Standards Wealthy countries use anti-dumping actions to protect their industries equivalent to a 25% tariff The WTO gives priority to Free Trade over environmental protection Environmental restrictions on imports have been overturned The WTO serves the interests of large Transnational corporations Expansion in the WTO to services trade and foreign investment reduces the power of national governments and increase the power of TNCs Criticisms of the IMF IMFs structural adjustment policies have had negative effects on countries experiencing financial shakes Focuses on debt restructuring constrains governments ability to pursue expansionary policies The IMF is controlled by Rich Countries Funded by countries according to quota The more you fund, the more votes you receive The IMF bailouts only help rich investors Short term loans only delay debt rather than helping developing nations The IMF is increasingly irrelevant Private investment funds and many emerging economies have large foreign exchange reserves Criticisms of the World Bank World Banks programmes are vulnerable to corruption Policy advice focuses on pro=market policies to nurture foreign investment Debt relief is an irresponsible economic policy World bank has increased its debt relief Has meant that poor countries expect that their debt will be written off Developing countries will incur more unsustainable debt Conditionality benefits investors rather than the poor Conditionality is economic reform in exchange for aid Pro market reforms benefit TNCs as it gives them access to increased population Organisations OECD organisation for economic co-operation and development Formed in 1961 and has 30 members Objectives Promote sustainable economic ad employment growth Increase living standards Maintain financial stability Contribute to world economic development G7 the group of seven USA, Japan, Germany, UK, France, Italy, Canada seven largest democratic market economies Account for half of the worlds GDP, trade and financial flows Discuss international economic and trade issues

Co-ordinate strategies and macroeconomic policies to overcome specific international economic problems G8 summits 2005-2009 G7 and Russia Agreed to an increase in foreign aid to developing countries by $50b in 2005 Cancelled the multilateral debt of $100b of the poorest countries Discuss reductions in greenhouse gas emissions G20 Summits in 2008 - 2009 Referred to as the new world economic order In 2008 Leaders discussed measures to re-capitalise the world financial system and strengthen the regulation of global financial markets, including derivatives trading and hedge funds In 2009 Pledged $1 trillion in loans and guarantees to affected countries and a massive boost to trade finance to help developing nations with their exports during economic crisis OPEC Organisation of Petroleum Exporting Countries Oil Cartel consisting of 12 major oil producing countries Power is derived from its ability to set oil prices and cause production costs to rise in oil importing nations Use its power as a political tool in 1973 rose oil prices to the US in response to their stance on Israel War in Iraq an increase in oil prices due to supply constraints and rising demand Higher oil revenue boosted the trade surpluses if OPEC countries increased imports and investment Impact of globalisation on the standard of Living in the global economy Variations in the standard of living in the global economy Standard of living can be compared in terms of GDP or income per capita and other indicators including adult literacy, nutrition, energy consumption and health services which measure quality of life. World Production and its distribution Total world production is $US 69700 billion Low income nations: 9.5% of world production 36.9% of global population Medium Income nations: 34.9% of world population 47.6% of global population High income nations: 55.9% og word production 15.5% of global population GDP per capita (2006) Low development counties: US$ 1,199 Medium Development countries: US$3,829 High development countries: US$25,100 Doctors per 100.000 people Low development countries: 25 doctors

Medium development countries: 145 doctors High development countries: 300 doctors Energy Consumption Low development countries: 134 kw per capita High development countries: 7,518 kw per capita Economic growth and development Economic Growth Sustained increases in real GDP over time Quantitative measure Has two main sources Increased use of land, labour, capital and entrepreneurial resources due to better technology Increased productivity of existing resources Economic development Structural changes needed in an economy for economic growth to occur Qualitative measure Transformation of an economy from a rural based agricultural society to an industrial based urban society Change in the composition of the workforce due to increasing specialisation Growth and development derive from production, income and expenditure Reasons for the development gap between nations Population factors A well educated population will increase occupational mobility and human capital Healthcare People are motivated by material incentives Capital accumulation: investment In order to grow, an economy needs to divert some resources away from current production to produce capital goods The process of adding to the capital stock of a nation is known as net investment Gross investment is the sum of net investment and depreciation As the population increases, more capital is required to equip it so as to maintain production. This process is known as capital widening the amount of capital per worker stays constant If the economy produces capital at a faster rate than the population grows, this is known as capital deepening Capital deepening promotes higher economic growth rates while capital widening is necessary to maintain current real GDP per capita Technological process Involves the introduction of new and better techniques of production in order to raise the productivity of the economy, i.e. output per worker per unit of time Technological progress is usually associated with new capital equipment and hence involves investment (embodied technical progress) Technological progress can be introduced by improvements in the education, skills, health an organisation of the labour force. (Disembodied technical progress)

Institutional factors Characteristics of certain societies that dont promote growth No or unreliable bankruptcy laws The extent of political control over the movement of people or goods The degree of public ownership of resources Export industries Allow increased specialisation and use of larger-scale production by utilising larger foreign markets Exports may also enable escape from the restrictions of low domestic demand Structural change may be accelerated through trade Economic Systems Developing economies Deal with the economic problem through the use of markets, (except central government planning in China) Has poor allocative efficiency and requires government to overcome obstacles to economic growth and development i.e. infrastructure In the process of raising their rates of economic growth and development, have lower incomes and living standards E.g. India, China, Brazil, Nigeria Newly Industrialised Countries Market system of allocation: government have also intervened to encourage the development of high technology export industries Invested heavily in education and training and encouraged domestic saving and investment E.g. Singapore, Taiwan, South Korea, Hong Kong Transition Economies Former capitalist countries in Easter Europe which are in transition to market capitalism through the creation of free markets and price determinations E.g. Russia, Poland, Hungary High Income Economies Have market economic systems characterised by the private ownership of resources and the price mechanism as the main instrument of resource allocation and the distribution of income. Driven by profit and consumer sovereignty Government role confined to welfare, public goods, economic and social infrastructure and the conduct of economic policy Examples, US, Japan, Germany, UK, France, Italy Impact of Globalisation International Convergence Tendency for the various types of world economic systems to converge under globalisation Majority of countries have adopted market economic systems with limited government intervention, or are in the process of transition from socialist command planning to capitalism Forces promoting the convergence of the economic systems Spread of similar technologies and economies of scale in production The growth of international trade and investment

The customisation of products and a new age of consumerism Improvements in technology and communications linking all parts of the globe The increased levels of migration Economic Growth, development and the quality of life Trade used to boost growth and development Korea: since 1969, life expectancy has risen from 54 years to 74 years, 98% of adults are literate and infant mortality has fallen from 85 per 1,000 live births to just 6 Pakistan and Uganda: exports growth of 8% between 1985 and 1997, economic growth was modest and there was little development No automatic link between trade and growth. Requires domestic reforms such as effective conduct of economic policy High Income OECD countries, East Asia and Pacific: sustained economic growth and rising real income being translated into improvement sin human development Twenty Countries have experienced reversals in their HDI since 1975, of which thirteen are in Sub Saharan Africa HIV/AIDS epidemic on life expectancy Trade, Investment and transnational corporations Trade: Trade grew twice as fast as global GDP in the1990s Greater composition of ETMs, services and intellectual property Australias trade dependency rose from 34% - 44% GDP (1980-2000) Investment Investment directed to emerging market economies e.g. China, providing capital injections which promote industrialisation, modernisation, urbanisation and economic development TNCs TNCs invest in developing and emerging economies (China and India) to take advantage of high economic growth rates, cheap labour and less stringent occupational heath and safety and environmental standards Distribution of Income and Wealth Rewards of globalisation are not shared equally OECD countries with 19% of global production have 71% of global trade in goods and services, 58& of foreign direct investment and 91% of all internet users In China gini- coefficient has risen from .3 in 1978 to .48 in 2007 Globally developed nations take advantage of impoverished Income heads to resource owners. Creates larger growth in urban areas. However, this comes with the exploitation of cheap labour China: 620 million pulled from poverty since 1980, poverty from 84% to 16% Poverty rate in Sub-Sahara Africa only ell from 53.4% to 50.9% Environmental consequences Industrialised countries Have created many of the global environmental problems by destroying much of their own biodiversity and over exploiting fisheries on a global scale Have high levels of energy use and green house gas emissions Developing countries: Pursued economic development at the cost of the environment caused deforestation and desertifications

Pollution costs China 8-12% of GDP p.a Globalisation created global conscience Carbon Pollution reduction scheme and Kyoto protocol Multilateral companies transfer capital and environmentally damaging processes to countries with low regulation Financial Markets Globalisation has brought rising flows of funds between nations especially portfolio investment. Through Stock exchanges, government bonds, corporate bonds Advantages Savings are more readily available in the Worlds financial markets Nations with large investment projects can often find funds more easily and cheaply (lower interest rates) than in the past A higher level of investment expenditure raises future production levels and future standards of living Disadvantages The Dominance of savings flows over trader related transactions in foreign exchange markets will produce difficulties for exporters and importers A loss in confidence of savers (Asian Financial Crisis 1997-99) and investors (GFC) can cause sharp fluctuations in exchange rates Nations which offer inferior returns or greater risk will find it more difficult to attract adequate savings for the economic development plans International Business Cycle Dependency on trade through globalisation means individual countrys business cycles will be heavily influenced by the international business cycle The greater international involvement, the greater the influence of international fluctuations Examples Asian Financial crisis in 1997 and its impact on demand reduced world growth from 4.2% in 1997 to 2.8% in 1998 2001- 2008 Australia resources boom from strong US and Chinese growth Collapse in US housing industry resulted in a fall in world growth from 3.6% in 2003 to -1.3% in 2009 Government Economic Policies National economic policies require flobal focus to reap the benegits of globalisaiton Issues: Reducing trade barriers for agriculture and services Microeconomic reform endeavours to make domestic producers competitive in international markets Banking reforms and capital market regulation to prevent volatile capital flows Strategies to address global problems Climate change, deforestation and industrial pollution Poverty: food security, housing, water, sewerage, transport, health and education CHINA Case Study Trends

Economic growth of 8-10% per year for the last 15 years Joined WTO in 2001. Exports grew 3times (2001-2008) to $1420b Inflation peaked at 5% p.a., but steadied at 1% p.a Rural unemployment 16%, Urban unemployment 4% Current account Surplus, traditionally 10% of GDP, steadied at 7% Gini- Coefficient increased from .3 in 19778 to .46 in 2004 Spatial inequality due to special economic zones 400 million escaped poverty since 1980 HDI increased from .62 (1990) - to .78 (2009) As of 2005, life expectancy had risen to 72.5 years and literacy had improved to 90%. Policy for growth Tariff Reforms China cut tariffs from 35% to 10% (1990 - 2004) Encourage greater domestic efficiency sent price signals to industries remain competitive firms were forced to raise efficiency and productivity. Allocation of resources through the principle of comparative advantage to their minimum opportunity cost. 90% of Chinas exports are from manufacturing, exposes itself to competitive export markets. Fixing of the Yuan managed peg The new exchange rate has appreciated in value, forcing increases to domestic efficiency, which enables long-term productivity gains Chinas Yuan is undervalued by 15-25%, which decreases the price of exports and increases the price of imports, protecting domestic industry by lowering competition. As of June 19 2010, proposed to end its peg to the US dollar, this will give other countries better trade competability Closing down of inefficient and unproductive State Owned Enterprises privatisation of industries and joint ventures from overseas companies. The private sector now controls 50% of the economy, up from 17% in the early 1990s. WTO Raised potential export markets Increased Chinas access to foreign savings and markets and the level of funds entering the economy Profit price signals raised investment Export base expanded to include more ETMs Agricultural Reforms (1978 1994): Houseold responsibility system replaced commune sustem Households could sell surplus produce invigorating enterprise. Raised production raised income GDP increased from $US 220 billion (1978) - $US 490 billion (1994)] Open Door Policy Special Economic Zones provided incentive for foreign direct investment with low tax, cheap labour and import duty exemptions Investment bought in technology and capital that raised productive capacity and hence exports. Exports have grown at 17% p.a Productivity growth According to the IMF: Productivity accounts for 50% of Chinas growth

Reduction in tariffs and abandoning fixing of the Yuan through raised technical ad allocative efficiency Development Political Factors State run communist system to a hybrid form of market socialism Improved Chinas social structure by redistributing income through increased private ownership Social Factors Increased utilisation of labour, has led to more women in the workforce China has improved from 96th to 72nd in the UN gender empowerment measure Environmental Factors Rapid economic growth has forced China to increase its stance on environmental protection from 0.8% in 2001 to 1.3% in 2005 Losing 8 12% of GDP a year to environmental degradation. Development Policy One Child Policy Greater GDP shared about a smaller population Income increased from $410 (1980) to $5900 92005) whilst 400m pulled from poverty since 1980 Welfare framework and direct investment 400b Yuan Great Western Development: Halting rising Gini-coefficient at .46 Minimal Capital Guidelines Resource use per Unit of GDP is 3x US Capital guidelines for oil and water attempt to internalise the externality Future Economic Growth Move from investment and import led growth towards household consumption retail sales rose 18.7% in may 2010 China: 30% of GDP is shared domestically whilst US household consumption represents 76% of GDP Unemployment Unemployment elasticity is .13 GDP owing to industrial nature of employment 10 million workers enter workforce each year, employment opportunities are limited Spatial Inequality Income per province varies between 8000RMB and 400RMB Avoid potential social divisions and political divisions Inflation High economic growth has led to continuing inflationary pressures. This occurred in 2007 with tighter monetary policy used to raise interest rate and tighten lending Government has target of 3% however this was breached in May 2010 The move of the Yuan away from a Peg will help reduce inflationary pressures