The Global Economy

The Global economy is the world economy

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International economic integration is the economic activity going on in the world. It is combined economy activity. This includes production, trade, financial flows, investment, technology and all other economic behaviour in and between nations GWP (Gross World Product) is the value of the worlds output. It is referred to as World Real GDP or Real Gross World product. It is the aggregate of a nations output or real GDP which is measured at Purchase Power Parity Globalisation is the interaction/integration of economies through trade, investment and financial flows. It is the increase in social, cultural and technological exchange. Globalisation involves the movements of Trade of goods and services Financial flows Investment and TNCs Technology, transport and communication Labour

The international and regional business cycles The global economy goes through growth + decline cycles. This is the international business cycles. Different areas of the world experience regional business cycles. For e,g, the Asian economic crisis in 1997. The business cycle has 4 stages: boom, downswing, trough and upswing. A period of 6 months of negative GDP growth is seen as a recession Free trade advantages: Increased efficiency Lower costs Lower prices Comparative advantage Specialisation Economies of scale

Disadvantage: Leads to an increase in competition Free Trade v Fair Trade Free trade has positive outcomes as the more open the economies the higher the growth rates. However, it is not always fair as poorer countries

wont have bargaining power and commodities will be low priced. Protectionist policies in EU and USA prevent free trade operation to protect domestic economies and have economic growth Role of international organisations: WTO-Main group promoting free trade IMF-Monitors and stabilises the international financial system through short term financing of BOP deficits World Bank-Promotes growth for mainly developing economies by providing long-term loans for investment The UN-Works on many issues: gender equality, promotes democracy, economic and social development, international health, governance etc OECD-Organisation of Economic corporation and development

Govt economic forums: G20 advanced economies + EU. G7/8 has 7 of the worlds leading countries and Russia. Trade blocs are a group of countries that allow imports to move freely or cheaply e.g. NAFTA. A common market is the EU which has common barriers for all economies. . An economic union such as ANZCERTA between Australia and New Zealand or multilateral such as APEC and ASEAN. Groups such as WTO and APEC encourage free trade. Trade blocs such as NAFTA support inefficient industries and promote development Protection reasons: Infant industry argument-Existing economies have economies of scale therefore new businesses need support to establish Dumping-Accepted reason. It is the practice of selling products temporarily cheaply that are overstocked Defence Domestic employment

Methods of protection Tariff-Tax on imports Quotas-Limits on quantity of goods imported Subsides-Govt grant that lowers the product price

Local content rules-Certain percent of the product should be domestically produced or tariffs will be imposed Export incentives-Subsides to help and encourage exporting. For example USA and EU give this to agricultural industries

What is the difference between economic growth and development? Economic growth is an increase in a nations productive capacity/GDP. This leads to improved living standards. Economic development is the physical situation in obtaining a better life. This includes increase availability of basic life needs such as food, shelter, health, protection and living standards and income in addition. Others include education, employment opportunities and self-esteem. Distribution of income and wealth: This is very unequal and impacts the poorer economies. This is measured by the Gini coefficient and Lorenz curve Income and quality of life Indicators: HDI (Human development index) measures life expectancy, knowledge and standards of living. Economies are classified based on development levels. This includes least developed countries, developing economies, emerging economies, High income/advanced economies. Wars, debt and other factors are reasons for differences between developing nations. Effects of globalisation: Economic growth Rise in living standards Less power and influences of individual nations Increase illegal immigration Increased financial instability e,g, Asian crisis and the GFC

Trade is beneficial and barriers may be faced. Many developed countries have high protection levels which affects trade. EU and NAFTA hurt poorer economies. TNCs: Operate with low tax Profits transferred back overseas (worsens BOP) Low wages (widens gap between rich and poor)

Increased economic growth will lead to increased use of limited natural resources which destroys the environment for profits. GFC 2008-2010 presents the effects of globalisation on the international business cycle.

Australia;s place in the global economy11/07/2012 7:55:00 PM

Trend in financial flows: Australia has participated in FDI. Australias FDI abroad is increasing faster than FDI into Aus. This has increased Aus profitability. However, this is debt overseas. This has lead to increased CAD as Aus borrows overseas to fund its debt

Australias BOP: Current account o o o o Goods Services Income Current transfers Capital account (infrastructure etc) Financial account (portfolio investment and FDI) CAD is paid for in this account

Capital and financial account o o o

BOP=CAD+C&FA surplus=0 Each year there is a CAD so borrowing increases to pay for the CAD which increases foreign debt. This debt cycle continues Terms of trade is the nations import prices in comparison to export prices. When this improves a nation is better off as it can buy more imports at the same level of exports Effects of BOP trends on Aus. The CAD has risen to 5.2% of GDP and net foreign debt to $654 billion in 2010. The value of a currency in comparison to another is known as an exchange rate. The TWI (trade weighted index) compares Australias currency with other economies. Australias exchange rate is determined by market forces. This is a floating or flexible exchange rate. Purchasers of $A: When Aus exports bought Tourists/students come to Aus Investments into Aus Aus businesses in another country return profits Speculators who watch rate increase and decrease

Returning profits, buying imports etc relate to this

Factors that influence the exchange rates: Interest rate Inflation rates Terms of trade Commodity prices Growth in real GDP Expected future value of the dollar

Main exchange rate types: Flexible/floating exchange rate Fixed exchange rate Managed exchange rate

The RBA has influenced exchange rates through the FOREX market. It adjusts irregular/extreme rates through selling and buying $A. The dollar may appreciate or depreciate. Fluctuations may lead to higher costs for goods/services Impacts of depreciation: Increased employment and growth Foreign investment Increased interest payments Foreign debt increases

Impacts of appreciation: Reduced debt and interest Cheaper imports which leads to lower inflation Less exports and increased unemployment Worsening balance of goods and services

Aus has had high levels of protection since 1950s in textiles, clothing, footwear and motor vehicles. Protection has lowered since the 1960s. For example manufacturing protection is now under 5%. Australia is involved with bilateral and multilateral trade agreements. This includes WTO, APEC and the cairns group

Bilateral trade agreements are between two countries. ANZCERTA is between Australia and New Zealand. The US FTA is also another agreement made with the USA and Aus The government provided $9.4 billion in 2007-2008 which assisted industries. Manufacturing received 80% of assistance but negatively affected mining and services sectors of the economy Globally, agriculture is characterised by high tariffs and high levels of government support. Agricultural industries are most disadvantaged by protectionist policies of EU & USA

Economic Issues
by GDP AD=C+I+G+X-M Consumption Investment (I) Govt expenditure (G) Exports (X) Imports (M)

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Economic growth is the sustained increase in a nations output over time. It is measured

Injections and withdrawals: I+G+X and S+T+M When economy is stable these are equal If I+G+X > S+T+M the economy will expand.

The simple multiplier 1/1-MPC or 1/MPS is the marginal propensity to consume

Changes in real GDP present changes in economic growth. This is the final value of all goods and services produced in the economy in a year Business cycle is the fluctuations over a period of years in a regular cyclical pattern Unemployed: 15 years and over Were not employed during the survey week Had been actively looking for work in the previous month Available for work in the survey week

Unemployment rate is unemployed/labour force x 100 Participation rate is labour force/working age population Types of unemployment: Cyclical, structural, frictional, seasonal, underemployment, hidden, long term. Economic costs of unemployment: Loss of output Loss of human capital

Larger budget deficit

Social costs: Increased crime rate Increased stress on individuals Social conflict

Inflation is the rise of the general price level, over a period of time in Australia. It is measured by CPI (Consumer price index) which is the prices of goods and services people buy in Aus The annual inflation rate is the percentage change over a 12 month period Imported inflation is inflation from imports which causes inflation in Aus as costs of production increase Inflationary expectations is what people think inflation will be in the short and long run Why aim for low inflation? To remain internationally competitive Protect individual purchasing power on fixed incomes Encourage savings in financial institutions Reduce inflationary expectations

Demand pull inflation is from an increase in the demand in an economy Cost push inflation occurs because of increased costs of production which pushes prices up External balance is achieved through sustainable flow of resources. This is measured by: CAD Foreign debt Foreign liabilities Terms of trade Exchange rate International competition

Income is the amount received in a given period of time. It is the flow of funds. Wealth is the value of the things a person owns at a point in time. Income and wealth inequality is measured by the Gini coefficient and Lorenz curve

Economic Policies and management

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Ecologically sustainable development is the use of resources in the economy to satisfy needs and wants and conserve the environment for future generations so that there is sufficient resources Market failures and externalities. The govt intervenes the mkt when the mkt fails to allocate resources efficiently. An example is if externalities affect society but not the consumers or producers Public goods are goods or services that can be consumed by everyone and no one can be excluded such as parks. There are challenged in aus to preserve the natural environment. This includes the Great Barrier reef and Murray Darling basin with land and water issues Australia is vulnerable to global warming and temperature will rise between 0.4 and 2 degrees (estimate) by 2030 and rainfall will decrease which will impact the economy Australia needs to turn to renewable sources such as solar energy and wind power to ensure long term economic growth as the non renewable sources used such as coal, iron etc will eventually run out. Australias main economic objectives: Low inflation Full employment Economic growth External stability Distribution of income and wealth and environmental sustainability should be considered by the govt

Potential conflicts: Inflation v full employment Full employment, economic growth and CAD Eco growth and full employment Eco growth and income and wealth inequality Eco growth and the environment

Macroeconomic policies are designed to help the government achieve its main objectives through changing AD levels (C+I+G+X-M) Fiscal policy is the govt budget changes. This includes govt spending (G) and revenue (T) to influence income distribution, resource allocation, economic activity levels. Govt budget outcomes: G>T is a deficit budget T>G is a surplus budget G=T is a balanced budget

Taxes can be classified as: Regressive-Larger tax from low income earners than high income earners Proportional Same tax taken from all groups Progressive-Larger tax from high income earners than low income earners

The governments fiscal stance refers to whether the govt is trying to increase growth (expansionary policy) or slow growth in an economy (contractionary policy) Three ways of financing a budget deficit: Monetary financing Borrowing from the Aus public Borrowing from overseas

Monetary policy is the use of changes in interest rates to influence money supply levels and economic activity to achieve basic economic objectives Under the requirements of the Reserve Bank Act the RBA must achieve a number of goals which are: Stability of Australias currency Maintenance of full employment Prosperity or welfare of the people in Aus

These are long term goals. There is also an inflationary target of 2-3% by RBA The monetary policy involves market operations. This involves the RBA buying and selling second hand govt securities and issuing Aus dollar securities by organisations in the money market to affect the cash rate The cash rate is the interest rate in the official money market. Impact of interest rate change (rise): Increased savings Reduced AD Lower inflation Attract foreign investment Lower inflation as Aus dollar pushed up by investment Aus exports less competitive overseas

Microeconomic reform is the attempt to increase output from inputs of labour, capital and materials by making the mkt work more efficiently There are three types of efficiency gains from microeconomic reform: Dynamic efficiency-efficiency Technical efficiency-maximum output Allocative efficiency no resources wasted

In 2006 National Reform Agenda was introduced. It includes three streams-competition, regulatory reform and improvements in human capital. Privatisation is the process of selling a public corporation to private shareholders. Corporatisation is a govt business enterprise that remains in govt ownership but is managed/operated like a privately owned enterprise.

Labour market policies-In 1990 more than 80% of workers were covered by an award. This declined to 16.5% in 2008 in Aus. In the last 5 years there have been major changes made to Aus industrial relations system Fair Work Act 2009 restored employees bargaining power and established new protection for employees. The main changes: Three Fair Work Australia institutions Increasing safety net (modern award and 10 NES) Bargaining assistance to lowly paid Unfair dismissal establishment Three types of agreements

Enterprise bargaining is a decentralised wage system. Wages are determined by individuals circumstances in a workplace. This method is advantageous as: More efficient and increases labour mobility Less unemployment Fewer industrial disputes Productivity determines wage High skills leads to high wages Monetary and fiscal policies needed to limit wage rises Wage rises may be excessive if there is close to full employment due to limited supply of workers Strikes larger and longer Labour productivity harder to measure

Disadvantages of this method:

Current labour market programs. Education: Building and education revolution Trade training centres in schools Transforming Australias higher education system Australian apprenticeships Industry training strategy program The National resources sector employment task workforce Rural pharmacy Workforce program (RPWP) Rural Health continuing education sub-program (RHCE) Job services Australia JobSearch Keep Australia Working

Triaining and skills:

Employment:

Environmental management in Australia: The Kyoto Protocol was committed to restraining greenhouse gas emissions The govt has set medium term target range for emission reductions between 5% and 15% below 2000 levels before 2020 The government has put forward the carbon tax 2012 which has pulled up prices of carbon in a systematic way through the economy. This limits carbon pollution.

Limitations of economic policies: Time lags The world economy Stagflation (inflation and unemployment high) CAD Political constraints

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