Topic 1 – The Global Economy
Students Learn About:
International economic integration • The global economy o Situation where the economies of individual countries are increasingly linked to each other and changes in a single economy can have ripple effects on each other.
• Gross World Product o Aggregate value of goods and services produced per annum worldwide (PPP) o Approximately $70 trillion US PPP
• Globalisation o Trade in Goods and Services: -Trade accounts for 63% of GWP (2007) -Trade of fuels has increased from 7%-12% (1995-2007) whilst manufactures is decreasing its share of world trade. -Causes of changes include TNC’s, blocs and new technology.
o Financial flows: -2005: $14 trillion was raised in global financial markets (vs $40 billion in 1975) -95% of financial flows are speculative, making them highly volatile -Causes of changes include decreased controls on FOREX markets and share markets and technological change.
o International Investment and transnational corporations: -FDI is increasing at a rate 3 times greater than GWP -In 2007, the OECD was the source of 85% of investment flows but the destination of only 68%. This reflects the growth of TNC’s. -There are now more than 79000 TNC’s, whose internal trade accounts for a third of total trade in manufactures.
o Technology, transport and communication: -In 2008, the world’s ICT market had grown to $4 trillion. This is both an indicator and a driver of globalization. -OECD countries control 91% of the internet, despite only accounting for 15% of the world’s population. -Efficient transport and communications enable greater trade in goods and services respectively.
o International division of labour, migration: -Only 3% of the global population work outside their country of birth. These migrants are mostly either part of a ‘brain drain’ or a ‘race to the bottom.’ -Capital is mobile and TNC supply chains are worldwide, meaning a global labour market is forming despite low migration levels.
• The international and regional business cycles o RBA research shows that 63% of the changes in Australian growth factors are a result of changes in G7 economies. o The global business cycle is transmitted between economies via trade and financial flows. o Other causes of the global business cycle include organizations which synchronise economic management and similar MP settings. o Regional business cycles are caused by strong trade links between economies of close geographic proximity. o These links are a result of the convenience of trade with neighbouring countries (e.g. low transport costs and short waits for M’s) and regional trading blocs / FTA’s.
Trade, financial flows and foreign investment • The basis of free trade – its advantages and disadvantages o Economies gain from international trade because they may not individually have the factor endowment, climate or technology necessary to produce certain goods or services. o Specialisation and trading increases an economy’s production possibility according to Smith’s theory of absolute advantage and Ricardo’s theory of comparative advantage. o Advantages of free trade: (and specialisation and increasing international competition) -Increased growth and material living standards (both by increasing productivity and promoting economies of scale). -Increased allocative efficiency on both a domestic and global scale. -Increased consumer sovereignty -Innovation and the spread of technology -Decreasing political tension o Disadvantages of free trade: -Short term structural unemployment -Infant industries argument