The global economy: Most economists now talk about the global economy, where the economies of individual countries are linked to each other and changes in a single economy can have ripple effects on other. The aggregate value of all goods and services produced worldwide each year in the global economy is known as gross World product. Economies are now more closely integrated, stronger and far reaching than ever before.
Notes: Globalization has become a dominant economic, political and social theme. Globalization is the integration between different countries and economies ND the increased impact of international influences on all aspects of life and economic activity. Globalization in recent decades has involved layers of influences in all directions. The United States is currently unrivalled as the leading world economy but its power is constrained by many other powerful economies in Europe and Asia.
There are many dimensions and statistics that can he used as measures of globalization, The major indicators of integration between economies / drivers of globalization are: Trade in goods and services * Financial flows Investment flows and transnational corporations Technology transport and communication ;k International division of labor and migration Notes: Globalization: Trade in goods and services – This is an important indicator of globalization as it is a measure of how goods and services produced in an economy are consumed in other economies around the world.
Trade in goods and service has grown rapid in recent decades, increasing from 58. 7 trillion LIST in 1990 to $39. 5 trillion LIST in 2008. Annual growth in the value of trade has been consistently around ethnic the level Of world economic growth. However, during economic downturns, lobar trade has contracted faster than world economic output, highlighting the greater volatility of trade compared with gross world product. The size of global trade reflects the fact that economies do not produce all the items they need, or do not produce them as efficiently as other economies, and have to import goods and service.
Major forces behind increasing global trade include the developments in transport and communication, government removal of barriers and joining of international and regional trade groups, The mix of what goods and services are traded, known as the composition of trade, can have an impact n individual economies, As global demand for certain goods grow, 50 too do the economies that specialist in their production. E. G. Demand tort fuels and minerals has increased Australia’s levels of exports and further increasing Australia’s economic growth. Trends in the direction of trade can also have an impact on individual economies.
E. G. China’s economies playing an increasingly important role in global trade, other economies have placed an increased priority on their trade relationships with china. Australia may respond to this by preparing for larger trading relationships through encouraging students to learn Mandarin at school. Notes: Financial Plows – Because finance is so important to how modern economies work, the globalization of finance has had a major impact in terms of linking economies around the world. Finance is the most globalizes feature the economies as money is able to move faster be,even countries than goods, services or people.
Since deregulation in asses and sis, international financial flows have expanded substantially. New technologies and global communications networks have linked financial markets throughout the world. This allows events in major international markets to produce immediate results wrought the world. E. G. The SGF which started in America and had a ripple effect on the rest of the world, While there is no one measure of international financial flows, all have shown dramatic increase during the globalization era.
An important feature of international financial floods are foreign exchange markets, which are networks of buyers and sellers exchanging one currency for another in order to facilitate flows of finance between countries. Foreign exchange markets have experience extraordinary growth in recent years. The value of a currency is expressed in terms of another currency and is known as he exchange rate between two currencies. Most countries determine the value of their currency through the interaction of the forces of supply and demand in foreign exchange markets.
Speculators (investors who buy or sell financial assets with the aim of making profits from short term price movements) are the main drivers of global financial flows as they shift hundreds and millions of dollars in and out Of financial markets worldwide to undertake short term investments in financial assets. The main benefit of international financial flows is that it enables entries to obtain funds that are used to fund their domestic investment. It allows investors in countries with low national savings ratios to obtain necessary finance large scale business or investment projects.
Therefore, global financial flows may enable a country to achieve higher levels of investment and therefore economic growth. Speculative behavior can create significant instability in foreign exchange markets and domestic financial markets. Speculators tend to act with a herd mentality, meaning that once an upward or downward trend in asset prices is established, it tends to continue. The international monetary fund is responsible for the overall stability tooth global financial system.
Its objective is to stabilize individual economies experiencing currency crises or financial turmoil in order to prevent flow on effects to other economies. Notes: Investment and transnational corporations – The global economy has witnessed rapid growth in the movement of capital, Growth of global finance and global investment can be distinguished by describing the shorter term, speculative shifts of money as finance and the longer term flows of money to buy or establish businesses as investments. Investment remains primarily a national economic affair.
Expansion of Foreign direct investment (the movement offends between economies for the purpose of establishing a new company or buying a substantial proportion of shares in an existing economy) is one measure of the globalization of investment involving the movements Of funds that are directly invested in economic activity or in the purchase of companies. FAD flows are strongly influenced by the level of economic activity. EDI flows have traditionally favored developed nations Of the organization for economic co-operation (COED), although they now benefit Wider set Of economies.
Transnational corporations (global companies that dominate global product and factor markets) will often have production facilities in countries around the world, sourcing inputs from some, manufacturing in another, and doing other packaging and marketing tasks in another country. As Tons establish or expand production facilities in a country, they bring foreign investment, new technologies, skills and knowledge, As TNT bring capital and job opportunities, governments often encourage Tons to set up in their country which is done through supportive policies such as subsidies or tax concessions.
Increased levels to mergers and take oversee are a significant cause of international investment growth. Mergers between some of the world’s largest corporations have seen the formation of companies worth hundreds of billions of dollars and the reduced number of truly global companies in different product markets. International mergers and acquisitions typically move in line with changes in global economic conditions. Notes: Technology, transport and communication – Partly the reason technology plays a central role in globalization is because the developments facilitate the integration of economies.
Technology is the ultimate driver of globalization because allows integration at a depth unthinkable in previous decades. Economies With strong take up Of new technologies tend to be the economies that are most closely integrated with other economies in their region or around the world. Developments in freight technology like standardized shipping containers, cargo tracking, and more efficient logistics systems facilitate greater trade in goods. I Cheaper and more reliable international communications through high speed broadband allows for the provision of commercial services to customers around the world.
In finance and investment, technology plays a key role in facilitating globalization through the powerful computer and communications networks that allow money to move around the world in a fraction off second. I Modern transnational corporations could not donation without the communications technology to international and mobile telecommunications and the internet. Technology is a driver to growth in trade and investment. The technological leadership to the US in recent years has boosted its trade of items such as software and computer equipment.
The LIST receives half of the royalties and license fees from global genealogy transfers and the rest are shared amongst a small group of developed countries. Other countries trade and import technology so they can adopt the new technology and produce it themselves. Business corporations that play a leading role in developing new technologies will often move directly into overseas markets in order to sell their products and services direct to local buyers. Technology drives increased foreign investment. Internet links businesses, individuals and nations in the global economy.
It allows greater communication within and between firms but reduces business costs that eave been a barrier to integration between economies in the past. The surge in worldwide internet usage highlights the rapid spread of technologies across countries in recent years and the increasingly interconnected nature Of the global economy. Notes: International division of labor and migration – Labor markets are less internationalists. People do not more jobs quite as freely as goods and services can be moved.
The industrialized world has recently become more restrictive about immigration of people from poorer countries. More people than ever are moving to different countries to take advantage of utter working opportunities. The movement of labor between economies appears to be concentrated at the top and bottom ends of the labor market. At the top end, highly skilled workers are attracted towards richer economies such as the SIS and the largest European economies because of higher pay and better opportunities available in those countries.
Smaller advanced economies such as New Zealand suffer from a ‘brain drain’ of some of their most talented and skilled workers, who are attracted to other countries by greater rewards. In effect, there is a global market for the most highly skilled labor. At the bottom end of the labor market, low skilled labor is also in demand in advanced economies where it may be difficult to attract sufficient people born locally to do certain types of work. Jobs that only require basic skills are often filled by migrants.
Trends in migration reflect an international division Of labor whereby people move to the jobs where their skills are needed, while the globalization Of the labor market is increasing but there are still barriers to working in other countries. E. G. Language, immigration restrictions, cultural factors etc. Most people prefer to Stay in their country Of birth where their family s. International division of labor is also evident from the shift of businesses between economies.
Corporations move production between economies in search of the most efficient and cost effective labor. In globalizes business environments, many producers operate what is sometimes called a global supply chain, with production facilities in several countries. The process called ‘offspring’ allows companies to shift production between countries to reduce costs. This results in the development of export oriented economies that can compete on their basis to their abundance of low wage labor.
Off shoring has en occurring for decades but recent years have seen service functions such as IT support and data management move to more competitive locations to reduce costs, The international division of labor reflects the economic concept of “comparative advantage. This theory states that economies should specialist in the production of the goods or services that they can produce at the lowest opportunity cost. Developing economies have a comparative advantage in labor intensive manufacturing as they have a large population of workers with only basic skills.
Advanced economies have shifted away from labor intensive manufacturing to focus on specialized service aspects of the economy that use more highly skilled workers who are in greater supply in advanced economies. International and regional business cycles: Economic activity levels in individual economies are never constant (in equilibrium). Economies experience booms and busts in the business cycle Which are caused by aggregate demand and supply shown on the right. It also shows that over time, economies usually experience an overall trend of growth in output (measured by increases in GAP).
The global economy also experiences booms and busts and has an international business cycle. For most countries, economic growth is stronger when the rest of the world is growing strongly. The extent of synchronization of economic growth levels across individual economies can be shown through the downturn of the late asses in LIST which spread to other advanced industrialized economies which resulted in the SGF. Research by the ARAB has found that 63% of changes in output levels in Australia can be explained by the changes in interest rates, growth levels and inflation rates in the group of seven (GO) largest industrialized countries.
Meaning tort Australia, domestic actors have less influence than international factors on economic rowan in any given year. The spread of economic_ conditions from one country to another is made more immediate by the increased integration of economies during the globalization era (Factors that STRENGTHEN the international business cycle): Trade flows -? booms or busts in one country will affect its demand for goods and services from other countries. The level of economic activity Build have flow on effects on the economic activity of its trading partners.
Investment flows – Stronger economic conditions in one country will make it more likely that businesses in that country Will invest in new operations in other nations, which will then add to their economic growth. Tons – With developed countries responsible for the majority Of global outflow of FAD, improved economic conditions in developed countries Will lead to increased investment in Other economies as Tons seek to increase their productive capacity and expand their operations worldwide. Financial flows – bank lending and financial flow linkages transmit financial conditions from advanced to emerging economies almost one for one.
Financial market and confidence – Consumer confidence and the ‘animal spirits’ f investors are influenced by conditions in other countries. This is shown by the strong correlation movements in share prices of the world’s major stock exchanges. Global interest rate levels – monetary policy conditions in individual economies are influenced by interest rates in other countries. International organizations -? The 68 or GIG largest industrialized nations can have a big impact on global economic activity.
Discussions to global economic conditions at summit meetings mean that the or GIG can act as an unofficial forum coordinating global macroeconomic policy and therefore can eave major effects on policy decisions in other countries, Notes: Despite these linkages, economic growth differs between countries. Many factors that influence the business cycle differ between economies (Factors that WEAKEN the international business cycle): Interest rates- High interest rates dampen economic activity and lower interest rates stimulate economic activity.
Government fiscal policies- If a government raises taxes it Build dampen economic activity and if they lower them, it will stimulate economic activity. Short – medium term. Exchange rates – impact on the level Of trade competitiveness ND confidence within economies. This in turn will influence economic activity. Structural factors – (different attitudes towards spending and saving, different population growth rates, different methods of regulating labor markets etc) differ between economies and influence the competitiveness Of economies and economic growth.
Regional factors – been economies differ. Come economies are closely integrated with their neighbors and are therefore very influenced by the economic performance of their major trading partners. Notes: Regional business cycles: Regional business cycles refer to the changes in economic activity in a reticular region. In the same way that countries’ activity can be affected by global changes, they can also he affected by regional changes.
SIS economy had a more pronounced impact on North American, Canadian and Mexican economies because of the integration through the North American Free Trade Agreement. Many of the 27 economies of the European Union are influenced by activity levels in Rupee’s biggest economies (Germany, [J and France). In the East Asian region, economic conditions are influenced by China and Japan. Regional business cycle in Asia has strengthened in recent years due to increased integration between Asian economies. Australia is more synchronized with conditions in East Asia than the US or European business cycles.
Other regions around the world have a higher proportion of developing or low income countries and they tend to be less regionally integrated. In Sub Sahara Africa, many countries are dependent on high income economies for their exports, and therefore are likely to be influenced by conditions in the world economy as they are by neighboring economies. In the South Asia and Latin American regions, a combination of regional dominant economies respectively play a key role alongside influences from outside the immediate region.
While regional business cycles tend to be dominated by the largest and most globalizes economies, it is also important to recognize the complexity of conditions at the regional level, Smaller economies can affect the performance of regional economies, even it they are not dominant economies or strongly integrated. Some regions perform more strongly than others and fluctuate more independently from other regions. Regional cycles are also part of the phenomenon of globalization because they result from increased cross border integration.
Business cycles of different region interact in complex ways to drive the level of economic activity around the world. Trade in the global economy: Poor several decades the growth of world trade had been much higher than the growth of the global economy. Trade has bought countries together, creating significant wealth and resulted in the restructuring of economies, Advantages and disadvantages of tree trade: Barriers to trade remain significant but in recent decades the global economy has seen significant progress towards free trade.
Free trade is a situation where governments impose not artificial barriers to trade that restrict the free exchange f goods and services between countries with the aim of shielding domestic producers from foreign competitors. Greer trade is based on the economic concept of comparative advantage (economic principle that nations should specialist in the areas Of production Which they have the lowest opportunity cost and trade with other nations).
The principle of comparative advantage states that even if one country can produce all goods more efficiently than another country, trade will still benefit both countries if each specializes in the production of the good in which it is comparatively more efficient. Comparative efficiency is assured by the opportunity cost of producing each good within that country, ADVANTAGES I DISADVANTAGES Free trade allows countries to obtain goods and services that they cannot produce themselves, or in sufficient quantities to satisfy domestic demand.
Generally occurs because of a lack of adequate resources. I An increase in short term Lineaments may occur as some domestic businesses may find it hard to compete with imports. However, the short term rise in unemployment should correct itself in the long term, as the domestic economy redirects resources to areas of production in which it has a comparative advantage. Pre trade allows countries to specialist in the production of the goods and services in which they are most efficient. Leads to a better allocation of resources and increased production within countries and throughout the world.
I It may be more difficult to establish new businesses if they are not protected from larger foreign competitors. I Free trade encourages the efficient allocation of resources because countries are producing the goods in Which they have a comparative advantage. Production surpluses from some countries may be ‘dumped’ on the domestic market, Which may hurt efficient domestic industries. I A greater tendency for specialization leads to economies of scale, which Will lower average costs of production and increase efficiency and productivity even further.
Free trade may encourage environmentally irresponsible production methods because producers in some nations may produce goods at a lower cost because of weaker environmental protections and environmentally damaging practices. I International competitiveness will improve as domestic businesses face greater competitive pressures from foreign producers and governments will encourage domestic industrial efficiency. I I Free trade encourages innovation ND the spread of new technology and production processes throughout the world.
I Free trade leads to higher living standards as a result to lower prices, increased production of goods and services and increased consumer choice as countries has access to goods that a lack of natural resources may otherwise prevent. The opening up of global markets leads to higher rates of economic growth and increased real incomes. Reasons for production: Protection can be defined as any type of government action that has the effect of giving domestic producers an artificial advantage over foreign competitors. The main protectionist measures include tariffs, import quotas and subsidies.
Most countries tend to impose at least some form Of protection to assist local producers in the face of foreign competition. There are a number of reasons as to Why a country might impose protectionist barriers, these include: Infant industries – New industries face a lot of difficulties and risks in their early years. They usually Start Off on a small scale With relatively high expenses. These infant industries may need protection in the short term to enable them to expand their scale and reduce their costs of production so that they can compete with he rest of the world.
Protection should only by temporary otherwise there would be no incentive for the industry to reach a level of efficiency that would enable it to compete without protection. Many industries that have received assistance as infant industries have continued to rely on this assistance for many years, Prevention of dumping – Dumping (the practice of exporting goods to a country at a price lower than their selling price in their country to origin) occurs when foreign firms attempt to sell their goods in another country’s market at unrealistically low prices.
Dumping may be used to dispose of large production ruptures or to establish a market position in another country. These low prices are usually only of a temporary nature but can harm domestic producers. Local firms that could normally compete with such foreign producers may be forced out of business, causing a loss in a country’s productive capacity and higher unemployment. Dumping results in lower prices for consumers in the short term but does not last as foreign producers will put up their prices once the local competition is eliminated.
It is generally in the country’s best interest to impose restrictions on such imports. Protection of domestic unemployment If local producers are protected from competition With cheaper foreign imports, the demand for local goods will be greater and this will create more domestic employment. Although protection Will tend to distort the allocation Of resources in an economy away from more efficient production towards areas of less efficient production. In the long run, this is likely to lead to higher levels of unemployment and lower growth rates.
Phasing out protection can lead to more lasting jobs being created in other sectors within the economy that are internationally competitive. Defense and self-sufficiency – Countries sometimes eave non – economic reasons for wanting to retain certain industries. Major powers generally want to retain their own defense industries so that they can be confident that in a time toward they would still be able to produce defense equipment, A similar argument can be made for self sufficiency of food supplies.
When a country adopts this approach it must accept that it may taint self sufficiency at the expense of the higher living standards that would be achieved with specialization and free trade. Other arguments in favor of protection – Trade unions in advanced economies often argue that producers should be retorted from competition with countries that produce goods using low cost labor. This is seen as a means of protecting the better living standards of workers in high income economies Countries sometimes block trade in goods because of environmental factors, such as the environmental harm involved in the production of certain goods.
Overseas producers may be able to produce some items cheaply because the producers are environmentally irresponsible and do not have to comply with the tougher environmental standards that apply in advanced economies. Notes: Methods of protection: Protectionist barriers have declined in recent years but there has also been a shift from traditional protectionist measures such as tariffs towards less visible measures such as administrative barriers and industry assistance plans.
Tariffs – a government imposed tax on imports. It raises price of imported goods making domestic producers more competitive. Economic effects of a tariff include: Domestic producers supply a greater quantity of the good. Therefore the tariff stimulates domestic production and unemployment. More domestic resources are attracted to the protected industry, leading to a reallocation of sources towards less efficient producers. Consumers pay a higher price and receive fewer goods.
This redistributes income away from consumers to domestic producers. Tariffs raises revenue for the government, although the more successful the tariff as a protectionist device the less revenue it will raise. Retaliation effect can be experienced. In response to tariffs on imports, other countries may impose tariffs on goods that are exported to them. Any increased production and employment gains for the import competing industries would be offset by losses in the nation’s export industries.