International Economic Integration Economic integration --- occurs when trade barriers are reduced or removed between countries

to facilitate the growth in free international trade and flows of investment (liberalisation) The main forms of economic integration Free trade area Customs union Common market Monetary union

The Global Economy Global economy --- where the economies of individual countries are linked to each other and changes in a single economy can have ripple effects on others. The 2 main activities in global economy Trade Investment

The IMF publishes the World Economic Outlook and classifies countries in the world into 2 main groups 1. Advanced economies o High levels of economic development o Average per capita incomes of over US$30,000 per annum o Are market based economies which have free enterprise systems of resource allocation and limited government intervention o E.g. US, Japan, Germany, UK, France, Italy and Canada (G7), Australia and NZ; NIEs 2. Emerging and developing economies o Include transition economies (former Communist countries, from planned to mixmarket economic system) in Eastern Europe o In the process of raising rates of economic growth and development, but have lower per capita incomes and living standards o emerging economies are undergoing rapid growth and development, e.g. China, India Data in 2010 Number of countries 34 150 % of World GDP 52.3% 47.4% % of World Exports 63.7% 36.3% % of World Population 15.0% 85.0%

Advanced Economies Emerging and Developing Economies

NOTE: The shares of advanced economies in world GDP and exports have decreased with the shares of emerging and developing economies increased from the previous year (2009). The top 5 economies (2010) in terms of world GDP 1. US (19.7%) 2. China (13.6%) 3. Japan (5.8%) 4. India (5.4%) 5. Germany (4.0%)

Gross World Product GWP ---= Global output (GDP of individual countries added together) In 2010, the contributions to GWP Trend Higher average rate of growth in emerging and developing economies compared to the advanced economies Share of world GDP has tended to increase over time by emerging and developing economies Advanced economies: 52.3% Developing and emerging economies: 47.7%

The advanced economies face challenges in sustaining future rates of GDP growth Undergoing financial restructuring after the GFC, with major financial institutions repairing their balance sheets and authorities strengthening prudential supervision Face demographic ageing which limits productivity growth and places increasing financial burden on government finances Have large deficits and levels of public debt which must be reduced through lower government spending and increased taxes, which will limit capacity for future economic growth

Globalisation Globalisation --- refers to the increasing level of economic integration between countries, leading to the emergence of a global market place or a single world market. The process of globalisation and factors Increased integration of economies through the liberalisation of trade Financial deregulation Improvements in transport and communications Growth in number of bilateral, regional and multilateral trade agreements

Trade in Goods and Services

Size/volume o World trade is growing at twice the rate of GWP/global output o Trade in goods and services has increased from $US 8.7 trillion (38% of global output) in 1990 to $US 40.8 trillion (70% of global output) in 2009 Composition of trade o Countries are able to pursue comparative advantage in specialised products o Shift from low value added to high value added exports Agriculture has declined Mining has risen due to high demand for resources from Asia Rapid growth in trade in ETMs (elaborately transformed manufactured services) Services make up 2/3 of global output; finance and communication services will be the fastest growing Direction of trade flows o The centre of trade is moving towards Asia o High income economies saw their overall shares fell from 82% to 70% between 1995 and 2009, in world merchandise exports o The fast growing economies of East Asia and Pacific region include China experienced share of global trade surging from 7% to 14% (China is at the heart of this shift) Trade dependency o Refers to the value of imports and exports as a proportion of GDP o Trend of increased trade dependency (trade intensity) o Australia: 28% in 1980, 38% in 2008

Financial Flows There are two types of investment flows 1. Foreign direct investment (FDI) o When a company in one country wants to gain a controlling interest in a company in another country; When a company purchases a minimum of 10% or more of the shares of the other company in the other country o Involves TNCs through either mergers or acquisitions (M&As), to increase size of their operations to pursue more profit o Tends to be long term and stable o Favoured by recipient countries 2. Portfolio investment o Investment undertaken by speculators interested in making money with their money through taking advantage of higher interest rates in other countries or by buying shares in profitable companies overseas o Tends to be short term and volatile o Recipient countries find this form less attractive Changes in global investment flows

Volume of flows o FDI has increased at about 3 times the rate of growth of GWP; valued at US$ 1.8 trillion in 2008 o Portfolio investment has increase at about 10 times the rate of growth of GWP; valued at US$ 716 billion in 2007 o Trade and investment flows are strongly linked and are cyclical (rising during upswing and boom; falling during downswing and trough) Composition of investment flows o Portfolio investment has grown much faster than FDI Direction of investment flows o Prior to GFC, developed economies received 57.5% of total world FDI, while the developing and emerging economies received 35.6% o However, following the GFC, the developed countries share decreased to 50.8%, while the share to developing and emerging countries rose to 42.9% o Favoured FDI destinations of MNCs are low cost manufacturing countries such as China, India, Vietnam and Thailand o Significant increase in outbound FDI from the BRICs