Check List – Topic 1 – The Global Economy

International economic integration

✓ The Global Economy - Globalisation refers to the integration between different
countries and economies and the increased impact of international influences on all
aspects of life and economic activity.
✓ The global economy is measured using the GWP Provide statistics to
✓ Indicators of globalisation, strong growth in: prove that
- International trade in goods and services globalisation is
occurring at a growing
- International financial flows
rate.
- International investment flows and TNCs
- Technology, transport and communication Also include the
- The movement of workers between countries drivers of each
✓ International and regional business cycle
- Provide recent examples of synchronisation
Trade, financial flows and foreign investment
✓ Free trade – governments imposing no artificial barriers to trade that restrict the free
exchange of goods and services (based on the comparative advantage argument)
- Advantages and disadvantages of free trade
Protection
✓ Reasons for Protection (same arguments as reasons against free trade)
- Infant industry
- Prevention of dumping
- Protection of domestic employment
- Defence and self sufficiency
- Environmental factors

✓ Methods of Protection

1. Tariffs (tax on imported goods). The effects include:

- Stimulates domestic production and employment (as imported goods are more
expensive)
- Domestic entrepreneurs are attracted to protected industry – leads to reallocation of
resources towards less efficient producers.
- Consumers pay a higher price and receive fewer goods. This redistributes income
away from consumers to domestic producers.
- Tariff raises revenue for the government (the more imports it restricts, the less
revenue it will raise).
- The retaliation effect

2. Quotas (control on the volume of goods that is allowed to be imported).

 - Reducing a quota is less protection for the domestic industry. Increasing a quota
allows domestic producers to have access to a greater proportion of the market
share.
- Quota stimulates domestic production and employment
- Consumers pay a higher price and receive fewer goods. Redistributes income away
from consumers to domestic producers in the protected industry and results in
lower overall levels of economic growth
- Quotas do not directly generate revenue for the government.
- Quotas also invite the retaliation effect

3. Subsidies (financial assistance to domestic producers, which reduces them to reduce

selling price and compete with imported goods).
- Reallocation of resources – producers are attracted to protected industries.
- Stimulates domestic production and employment
- Consumers pay a lower price and receive more goods, because the subsidy shifts
the supply curve for the sector to the right. Consumers still pay indirectly for
subsidies through higher taxes.
- Subsidies impose direct costs on government budgets.
- This is the more preferred method of protection, specifically for export industries
4. Local Content rules – goods must contain a minimum percentage of locally made
parts. This guarantees the domestic industries a share of the market
5. Export incentives - program to give domestic producers assistance such as grants,
loans or technical advice to encourage businesses to penetrate global markets or
expand their market share. This type of protection has increased significantly in recent
years. Eg: EMDG provides direct funding and assistance to local manufacturing to
break into international markets
✓ Trade Agreements – two main ones: preferential free trade agreements (regional or
bilateral) and multilateral agreements (open to all nations).
✓ Trade agreements – Global (WTO), Multilateral (EU, NAFTA, APEC, AFTA), Bilateral
agreements (CERTA, SAFTA, TAFTA, AUSFTA)
✓ International Organisations:
● WTO – advance global trade agreements and resolve trade disputes between
economies
● IMF – maintain international financial stability particularly in relation to foreign
exchange markets.
● World Bank – helping poorer countries with their economic development
● United Nations – international security, the environment, poverty and
development, international law and global health issues
● OECD – democracy in the market economy (36 members)
● G7 – coordinating global macroeconomic policy between 7 largest industrial
nations. Other issues concerning the G7 are climate change, global poverty and
security. The significance of this group has declined in recent years as powers
such as China and other emerging economies have shifted the economic
balance
● G20 – coordinating global responses to economic conditions

Globalisation and economic development

✓ GNI – sum of value added by all resident producers
✓ PPP – purchasing power parity (exchange rates are adjusted to equalise prices in
different economies)
✓ difference between economic growth (measures standard of living) and economic
development (measures quality of life)
✓ HDI – measure of economic development. It takes into account:
- Life expectancy at birth
- Levels of educational attainment
- GDP per capita
- Australia’s HDI (third highest) is .939, the highest HDI is in Norway at .95
✓ Categories of development in the global economy – advanced, developing, least
developed, and emerging
✓ Reasons for differences in growth and development between nations

Domestic Factors Global Factors

- Economic resources - Global trade system

* Natural resources - Global financial architecture

* Labour supply and quality - Global aid and assistance

* Access to capital and indebtedness - Global technology flows

* Entrepreneurial culture

- Institutional factors

* Political and economic institutions

* Economic policies

* Government responses to globalisation

✓ The effects of globalisation

- Economic growth and development
- Income inequality
- Trade investment and transnational corporations
- Environmental sustainability
- Role of the financial markets
- The international business cycle