Economics



The global economyFeatures of the global economyNature of the global economy & globalndefine the terms globaln & global economyOutline 2 econ indicators of the globaln processdefine gross world productExplain why globaln has int fin flows.The global economyGross world productGross world prodn measured by totalling conventional GDP estimates for each country.Globaln-tradeGlobaln has significantly higher growth in world output & even higher in world trade-I & techy Tech progress has played a pivotal role in the very large ↑ in per capita outputWorld stock mkts, linked by new techy have ↑ their turnover & provided greater access for indiv, co & gov to raise fundsThe ? brought by IT has spread to most regions & countries of the world, reducing costs of conducting int businessecon of scale of prodn IT has also a global mkt in ICT goods which has resulted in structural ? to the way G+S are produced & distributed to consumersInnovative techy in developed countries has exported to the rest of the world techy diffusion-financeThe main objective of derivatives trading is to offset fluctuations in share currency, commodity & i rates prices.The growth in derivatives trading is due to co seeking new products to suit their risk management strategies & the spread of fin innov form global primary & secondary mkts to the derivatives mkt.-labourAn int mkt for labour has developed with guest workers from developing countries gaining temp empl in developed & newly industrialised countries in response to labour shortages in particular industries in those countries. Int migration continues to growHowever, problems still arises as a result of a global labour mkt such as;-a brain drain of highly skilled workers in particular countries-workers from developing countries are often exploited by their employers in foreign countries-the emergence of the black mkt in migrant workersGovs that have embraced a globaln strategy have generally pursued policies to raise labour prody as a way of ↑ competitivenessNatural ↑in the developed countries has slowedto an aging popn , an old w/force & higher age dependency ratiosIn developing countries the rate of natural↑ is higherto a younger popn i.e. the working age popn is expanding but jobs may not keep up with this growth.The int business cycleInt business cycle-? in world output over timeThe general trend is for world output to grow in real terms overtimeBusiness cycles are irregular & unpredictable. ∴ govs intervene to smooth out the fluctuationsThe features of each stage in the world business cycle are as follows:Trade & fin flowsExplain the difference between world trade & fin flowsExplain why the process of global has int fin flowsAnalyse how trade & fin flows between developed & developing countries can the level of ED in developing countriesDiscuss two reasons for the growth in trade & fin flows in the world economyThe globaln of world trade the emergency of an emergence of a global mkt place with the int of the fin system & the dominance of MNCs in world trades.The growth of intra-regional trade sole trade increasingly linked to direct forum I.The growth of Asia- pacific region & china as the dynamos of the world economy. The increasing econ power the NIEs, China & India, fuelled by sustained high rates of EGs, invts & trade vol, posed a competitive threat to US & EUTrade was linked with I as companies used foreign direct I to assess foreign market. They have developed intra-firm & intra-industry trade networks thru global prodn webs & expansion of X to global markets.Trade in ETMs & services have grown more rapidly than primary products.Cap flows were very mobile, with trade surplus countries of Japan, Germany, China, Taiwan, Hong Kong & Singapore exporting cap of trade deficits countries such as the USA & Aust? in the size & pattern & direction of trade & IIn the 1990s & 2000s in the econ importance of china & India has been an important part of the process of contributing.These flows have ↑ more rapidly than the growth in world output over the past several decades.These trends have resulted partly from reductions in policy barriers to cross border trade & cap flows, & partly from improvements in ICTThe ↑ in global econ integration has raised living standards by allowing countries to focus on the prodn & X of G+S in which they have an comparative advantageGreater fin integration have also allowed S to be invested where returns are expected to be highest & enabled fin risks to be better diversifiedHowever there is a scope for it to exp& as emerging economies ↑ their share of world trade & trade services ?.The Forex mktThe Forex mkt provides the links that allow parties in different countries to determine the value of a transaction in their own countries’ currencyThere has been substantial growth in the Forex transactions which are reflective of the growth in world trade & I as a result of continuing deregulation & integration of fin mkt, ↑ globaln & improvements in techy & communications.Dev in Forex mkts have mirrored the rapid growth in the turnover in fin mkts with holdings of fin assets growing faster than econ in general.The main types of transactions were spot transactions, outright forward transactions & swaps.The main participants in Forex mktsBuyers & sellers e.g. exporters, importers ,traveller, firms moving funds for direct or portfolio I ,gov paying for MIntermediaries e.g. Fin institutions providing a service or trading in foreign currencySpeculators who seek to anticipate ?s in the exchange rates. E.g. if $AUD are expected to fall in the near future against the $US then they will sell $AUD now & buy US & then in the near future they move back to $US to $AUD after the fallThe impact of ?s in trade & fin flows on econ↑X↑total sales↑D(GDP)↑GDP=↑D for FOP↑Y for FOP(h/holds) = ↑C+↑S +↑T(gov)Free trade & protectnDefine the term free tradeExplain the concept of comparative advantageAnalyse the econ benefits & cost to Aust associated with free tradethe basis of free trade-its advantage & disadvantageseach country will gain form trade by specialising in the good which it has an absolute advantage & exchanging the surplus for the other country’s goodthe principle of comparative advantage ↑ the potential for benefit from int specialn & trade as each country would specialise in the good which has the lowest opp cost before trading thereby ↑ efficiencyThe advantages of free tradeThe disadvantages of free trade↑specialn econ of scale Infant industries will find it difficult to compete against more efficient & est. foreign firms↑ prody of resources Allocative efficiencyJob displacement in uncompetitive industries can structural unempl & more regional inequality↑comp between firmslower consumer prices & higher real Y -ve externalities if firms do not pay for the unintended consequences of their prodn activitiesProducers have a < incentive to innovate in prodn thru the cost saving techy to ↑their competitiveness unfair price cutting where countries who are efficient producers of a good ‘dump’ it in a foreign country selling below costmore efficient allocation of the world’s resourcesMay not be able to diversify their econ base cause they specialise in prodn according to comparative advantage< comp between domestic & foreign producersCan experience an ongoing deficit in the BOP if its unable to finance its M expenditure with its X Y Equalisation of resource pricesHigher Nat y & living standardsHigher world outputDefine the term protectionDiscuss reasons why nations might protect their domestic industriesreasons for protectn-infant industry argument To allow them sufficient time to achieve a competitive scale plant to compete in O/S mkts. This protectn can be removed once they mature.However these firms may become insufficient as they rely too heavily on it & lack incentive to innovate. ∴ they may be uncompetitive & insufficient TOT argument –maintains that a large country can use protection to improve its TOT. A tariff may the country’s D for M & if the country buys a significant proportion of the world supply, it may encourage foreign country may impose a retaliatory tariff on the home’s country’s Xs nullifying the +ve effect.-Domestic emplErecting tariff walls to protect import competing industries may ↑ their relative competitiveness, share of prodn & emplHowever protectn of these industries may be at the expense of these of empl in efficient X industries & foreign countries may also retaliate with similar schemes to protect their domestic levels of empl.Reducing M may also raise the exchange rate & reduce the competitiveness of X industries.Reducing a BOP deficit-Aust could use protective devices to reduce M spending & switch to domestically produced goods to reduce its deficit. However this could discourage specialn & resources may be diverted to less efficient industries. Also, consumers may face-DumpingIt presupposes that M are being sold below the cost of prodn which local mkts which find difficult to compete with-DefenceNat self sufficiency in a event of a warmultifunctionalityOutline 3 methods of protection for domestic producersEvaluate the impact of the imposition of a tariff on consumers & producers in a domestic economyExplain 2 benefits associated with a reduction in global protectionist policies.Analyse the econ effects of protection on a domestic economyExplain the econ effects of a reduction in the general level of protection for the Aust economy.Methods of protection & the effects of the protectionist policies on the domestic & global economy-voluntary X restraintswe won’t trade in certain goods if you won’t vice versa-tariffsProtection effect- amount supplied to mkt by local producersConsumption effect- on M as a result of tariffRedistribution effect-transfer of Y form consumer to producers-subsidies-quotas-local content rulesE.g. Has to be 30% aust components-X incentivesGov sets up fair trade which promote Aust productsThe effects of protectionAt macro level:Inflation may result from the distorting effect of tariff on M prices which can be passed into the domestic cost & price structure. This may additional wage D if wage indexation is part of wage fixing process. Those industries using the outputs of protected industries as inputs in their production process will pay a higher price for them b/cause of tariffs. -ve protection may occurs where efficient X industries are penalised by paying higher prices for cap equipment & b/cause they cannot easily pass on these costs in world mkts, their competitiveness is reducedEG is retarded by protection because resources are not being used efficiently in protected industries cap & labour may not be utilised intensivelyX earnings are lower than optimal since protected industries tend not to seek O/S mkts because they may be inward looking & abnormally risk averse M spending in Aust is highly elastic & growth in domestic Y ‘import binges’ which have created a large CAD, ∴ been impeded by protection.At micro level:Protection tends to be -ve on the performance of protected panies engaging in rent seeking behaviour use their resources instead of boosting efficiency, Xs` & profitability but continued to spend funds on political lobbying.Contempy trading blocs & agreementsThe role, importance & influence in the global economy of blocs & agreementsTrading bloc-group of nations who agree to trade more freely with each other by-expanding the benefits of specialn beyond Nat boundaries thru reducing trade barriers-facilitating the mobility of FOP across Nat boundaries giving wider access to opp to EG, promoting the best use of resources with fewer restrictions & ↑total emplAdvantages & disadvantagesEU,NAFTA,APEC,ASEAN,CERTA International organisationsDiscuss the role of the WTO in promoting freer tradeDiscuss the importance & influence of the IMF & world bank into the global economyThe role, importance & influence in the global economy of int orgThese global org promote policy co ordination amongst countries & attempt to provide rules for trade & invt transactions, & a forum for discussion of trade related issues & disputes.WTO ,IMF, World BankWTO-organisation that enforces existing WTO agreement, resolves trade disputes & is a major forum for global trade negotiations pursing goal of global free tradeHas the task of monitoring dev in world trade & reviewing barriers to world tradeIMF- main role maintain international financial system, assisting economies who face major economic crisisIts mains roles are promoting int monetary cooperation, facilitating the expansion of int trade, promoting exchange rate stability & supporting the multilateral payment systemWorld bank- main role to assist poorer nations in the long term with ED thru loans, dev assistance, technical advice, & primary role has the aim of eliminating global poverty by 2015Attempts to influence the design of macroeconomics & micro economics polices in developing countries to create conditions conductive to foreign invt & dev The world economyImpact of globaln on the standards of living in the global economyVariations in the standards of living in the global economyY & quality of life indicatorsTo measure aver standards of living thru either:-the aver Y in each nation & then convert this money Y level into one of the main currencies used across the world (GDP)-quality of life where we look at aspects of the typical life experience in a nationThe measure of the aver value of prodn can be used to indicate Y levels of as Y reflects the value of prodn.Contrasts in levels of developmentDescribe 2 econ benefits of developing countries sustaining positive rates of EGExplain the relationship between ED & EG Explain the econ Reasons for differences in the standard of living between two nations.Difference between growth & developmentEG involves:When a economy can produce more G+San ↑in the productive capacity of a nation which ↑the vol of material G+S to satisfy wants & needsthere is an ↑in prodn ,C & I overtimeEG may have -ve social impacts e.g. environ degradation or loss of traditional culture & valuesED is:A measure of well being of an nationMore comprehensive than EGIt occurs when GDP per capita ↑ as well as improve the welfare of the popn. e.g. a ↓in poverty levels, ↑empl, improved health & longer life spans may not result in ↑GDP per capitaFactors contributing to EG2589530-2455545EG is needed to sustain the process of ED by enhancing the ability of a nation to its prodn of G+S. this will Y & empl opp as well as tax revenue to the gov which can be spent on infrastructure. Sustained rates of EG can levels of ED because more industrialised & urbanised, there are improvements in the level of human dev.Reasons for differences between nationsThe contrast in the level of dev between developed countries & less developed countries is referred to as the dev gap. Their features include low per capita Y’s, low savings & invt levels, low cap formation & EG. However countries like India & china are closing the gap.The dev gapcontrasts in living standards between DC’s & LDC’s. thus, main causes of dev gap are:Developing economies, NICs, transition economies, high Y economies4 categories of countries in global economy-6858058420∴global economy consists countries at different stagesImpact of globalnOutline ONE positive & ONE negative impact of globaln the environment. Int convergenceThere is a tendency for various world econ systems to converge (become similar) under globaln leg Russia & china gone from socialist/ planned economies to a more Mkt based capitalist economy. Forces promoting int convergence as econ system includes spread of new technologies increase int trade & I, customisation of products, increase of migration & travel.EG, ED, Quality of lifeMany countries have liberalised trade to boost EG & level of ED e.g. Singapore, South Korea & China have been successful in boosting int trade which has then resulted in improvements in HDI per capitaHowever, other nations like Pakistan & Uganda have had increase X growth but achieved only modest ft & little progress in their tem. Thus the is a strong like between grouter & rate bit net necessarily an automatic oneGlobal trade, I & TNC’sTrade in G+S twice as fast as global GDP trade in ETMs, services & intell propertyNow global prodn facilitiesMain push to global trade has been the liberaln of trade in developing countries via regional trade agreements, membership to WTOInt invt flows in 1990s onwardsTNC’s are continually investing cap to expand their global web of prodn facilities which are increasingly being based in developing a emerging economy like china & IndiaDistribution of Y & wealthEnvironmental consequencesFin mktThe int business cycleImplications for gov econ policiesCase study: chinaDescribe one strategy that a developing country could use to promote EDImpact of GlobalnEconomic growthGlobaln↑ liberalisationboost EG & the level of econ dev.The impacts of globaln on china have been profound:- Agric as % of GDP has ↓, Industrial prodn↑15% since 2001 it has enabled china to move from an agric economy to an industrialised economy & a rural based society to a urban based society-EG 8% in 1990s & over 10% 2003-2008-has a very large current account surplus of 9.8% GDP-foreign invt funds used to finance export industries have enabled china to maintain large foreign currency reserves-has high domestic levels-its new tax incentives provide strong incentives such as lower tax rates to ↑prody China is exploiting the growth advantages of globaln thru foreign invt & int trade & is now a major contributor to global output, growth, trade & invt.EmplIncreased exposure to the global economy has resulted in millions of job cut from SOEs thus ↑unemplAlso, many firm & businesses are restructured this is resulting in many inefficient industries being closed which is contributing to the ↑unempl of 3.1%(97)-7.7%(08)InflationInflation has ↑ drastically -0.8%(2002)-4.8%(2007)Econ developmentAs a result of boosting EG it has:-↑ HDI 1980(0.554) 2005(0.777)- ↑ aver Y $293(1985)-$2,025(2006)- Significant improvements in life expectancy, infant mortality, literacy rates- Greater push in human rights issues & welfare such as unempl benefitsHowever, while EG has resulted in improvements in the general quality of life in china, these gains have not been shared equality within the economy. examples include:-as the effects EG is spread out unequally between rural/urban areas & east/west provinces there has been significant differences exist in quality of life between rural/urban, east/west provinces, males/femalesDistribution of Y & wealthAs the benefits of ↑EG have not been distributed evenly in the economy as China’s economy is becoming one of extremes-causing econ & social imbalanceThere are differences in Y levels where as urban & eastern Y level are higher & increasing faster than rural & western provinces Y are this disparity is continuing to grow.China has shown large disparities in econ & social outcomes between coastal & inland regions, a trend that reflects the differences between rural & urban areas. Coastal areas also experience faster EG from the benefit of being part of the special econ zones.As a result the bulk of the nation’s Y are concentrated in the metropolitan & coastal regions.Despite the imbalances, EG has reduced poverty in china as Y continued to increase.EnvironmentGlobaln can also have negative impact on the environ. China is experiencing severe environ problems & degradation from the rapid rate of EG.It has ↑ it’s spending on environ protection under the country’s tenth five year plan. this was a welcome dev in the Chinese environ policy as an OCED study in 2007 found that up to 7% of china’s GDP is lost from pollution such as acid rain on crops, medical costs & lost output & if stronger environ laws are enforced GDP may rise to 13%Co2 is a major problem for China as it contributes 16% of total global emissions in 2003.Volatility of EC cycleBeing more exposed to the global economy, china is feeling some of the impact of the severe global downturn.The World Bank has forecast that china’s growth will continue to grow but at a slower rate. It is expected to exp& by 7.5% in 2009 & 8.5% in 2010 as a massive decline in invt & the contraction of key export mkts dampens activity.China has also announced a fiscal stimulus package to boost the economy. The package is infrastructure focused commodity intensive spend. This package will help cushion the effects of recession.Strategies to promote growth & devAgric reformsThis involved the abandonment of the commune system & its replacement by the household responsibility system where h/holds could make their own production decisions & sell any surplus output in free mkts once the state quota was met.This new system led to dramatic increases in food prodn & surplus Y was invested in privately run town & village enterprises responsible for light manufacturing of industrial goods.Measures such as establishing a system of enforceable l& rights, providing greater access to funds for farmers, allowing freer movement of rural workers from country to city regions are still needed & remain a priority to ↑EG & EDOpen to the world policyThis policy focused on foreign trade & invt, designating special econ zones as well as incentives to attract foreign invt & enterprises.Also to encourage invt & competition the govt has removed 120 regulations that limit private cap flow & approved 30000 new FDI projects in 2003.The ‘open to the world policy’ has china to significantly ↑int trade attracting FDI & TNCs to invest by broadening its domestic mkt to global exporters. The ↑invt ↑employment opportunities in industries↑Y for C+S in the economy. The ↑Y then better standards of living thus improving econ dev. Also, the ↑ savings↑invts funds in infrastructure such as health & education ↑ HDI, thus promoting EG & dev. Tax reformsTaxation reforms were introduced shifting the power to collect taxes away from provincial govt to the central govt in order to improve efficiency of tax collection & finance infrastructure spending which would encourage an expansionary effect on the economy thus promoting EG, this strategy encouraged ED where improved efficiency in infrastructure improved standard of living & raise the HDI.Change to banking lawsBanking laws were introduced to develop network banking, the establishment of stock exchanges, & a more efficient cap mkt to facilitate savings & invt in china.This made funds easier to access & encouraged businesses to invest EG an expansionary effect on the economy. As a result of invt this would of a in jobs YTariffs cutCuts to tariffs & other forms of protection were used to encourage greater domestic efficiency through direct import competition. China’s average tariff rate was reduced from 32% in 1997 to 15% in 2000.These cuts protection supported china’s drive to attract foreign invt & open its domestic mkt to foreign competition thus promoting EG, increasing FDI by 20% in 2008WTO admissionIts membership with the WTO meant that it could ↑trade liberalisationintegrating better with the world economyshifts from the previous confines of commodity trade to all-directional opening. Therefore, this opened china’s huge domestic mkt to global exporters as well as increasing access to other countries mkts especially with USA & Europe & members of ASEAN.China’s WTO admission has successfully promoted EG & ED where it has encouraged investment in china by foreign companies this has impacted on china’s trade ↑export earnings injecting money into the economy-->EG. In terms of ED, the ↑investment & ↑exports as D↑ has ↑jobs↑Y↑living standards.Fiscal stimulus packageBeing more exposed to the global economy, china is feeling more of the impact of the severe global downturn. In order to cushion the effects, China announced a fiscal stimulus package focusing on infrastructure & commodity intensive spending to boost the economy. However this strategy has little impact on sustaining china’s EG & dev. The World Bank forecasted that china’s growth will slow down to 7.5% in 2009 & 8.5% in 2010 well below the average the 10% growth it sustained between 2003-2008.this is as a result massive decline in investment & the contraction of key export mkts dampens activity. ................
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