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general economics
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Topic 1 - The Global Economy Globalisation Globalisation is the process by which the natural and government-created barriers between national economies are broken down. It can also be thought as the geographical dispersion of industrial and services activities and the cross-border networking of companies. Globalisation trends include: 1. The increase in the trends of goods and services between national boundaries - global markets. 2. The increase in movement of capital, labour, and technology between nations - global flows of factors of production and resources. 3. The related increase in interdependency between national economies. 4. The growth of the size of the number of TNC which has business operations in many nations. E.g. IBM, GMH. 5. The tendency of consumer trends to become worldwide. E.g. Jeans and Fast food. 6. The need for more intergovernment consultations and agreements to facilitate the increase in economic contacts and to deal with inevitable increase in disputes. E.g. WTO. 7. Increase in environmental damage through out the world. Existence of the Global Economy It's debatable whether the global economy exists yet. The integration of our economy is far from complete. 1. Labour is anything but mobile in countries. It's mobile in theory, but not in practice, as seen in the European Union. 2. Total integration is not likely to occur. Since most non-tradables are services, and services account for roughly 80% of GDP in most "high income economies", it's likely that other countries' non-tradables sector is about as big as ours. So the natural barriers between economies remain formidable. The 4 Levels of Globalisation 1st Level - Trade between Countries The 1st and most basic level of globalisation is trade between countries. Since the war, trade has grown roughly twice the rate that "Gross World Product" has grown. This implies huge growth in 'intra-industry trade’ i.e. trade between same industry, different countries. Growth of trade has been helped since the war because: 1. The 8 rounds of multilateral tariff reductions under the GATT. 2. Technological advance. In recent decades, trade has risen because of this rather than liberalisation. 2nd Level - Growth in Cross-border Investment The 2nd level of the globalisation process is the growth in cross-border investment and the consequent transfer of technology. This relates to DFI long term investment in production plants and suchlike and hence, the emergence of multi-national firms. The policy of import replacement behind high tariff walls adopted by most newly independent developing countries in post war years encouraged the development of the multinational. 3rd Level - Growth in Short-term Capital Flows The 3rd level of globalisation process is the growth in short-term capital flows e.g. "Portfolio investment" in bonds and listed shares. This trend arised from the breakdown of fixed exchange rates in the early 70's, the move to floating exchange rates and the related abolition of exchange controls, the emergence of offshore capital markets and the deregulation of most high income economies' financial systems. 4th Level - Movements of Labour The 4th level of globalisation is movements of labour. Not much quickening of the pace has taken place in recent times. Countries' attitudes to migration are influenced far more by political/social considerations than economic ones, thus, hard to see this changing in the future. Most high-income countries have arrangements that facilitate short-term transfers of skilled multinational executives. Some countries may experience 'brain drains'. Land is obviously a totally immobile factor of production. Labour will stay immovable for a while. Global Economy Size and Growth Rate The estimated total output of the World Economy in 1999 was valued at $40, 714 billion US. The World economy has been growing, averaging 3.2% annual percentage growth during the 1990's. Problems involved in the measurement of the world economy include: 1. Inflation 2. Tax Avoidance 3. Fluctuations in asset values 4. Lack of Statistical date Problems associated with using the absolute measure: 1. Large number of products that need to be compared. 2. Differences in transport cost between and in countries. 3. Tax rates. 4. Trade barriers, which prevent this from being an accurate measure of relative prices. The global economy goes through cycles of growth and decline. These cycles are referred to as the International Business Cycle. Trends in the 1990's World economic growth was slow at the start of the 90's, due to low growth in Europe, the US and Japan. It then continued to grow an average of 4% in the mid 90's but suffered a slowdown due to the Asian Crisis in 1997. World Trade The growth of trade since the war has been greatly facilitated by the 8 rounds of multilateral tariff reductions under the GATT. However, the growth - and hence benefits from it - was biased in favour of trade between 'high income economies' because of the decision early on to exclude textiles, clothing and agriculture from negotiations. Rapid growth in trade in services that has occurred in recent decades is explained more by the technological advances than by liberalisation. 5 Most Important Trading Nations % of World Exports of Goods and Services -1998 1. USA 14.1% 2. Germany 9.5% 3. Japan 6.9% 4. France 6.0% 5. UK 5.7% 19. Australia 1.1% Investment Direct Investment involves the purchase of a significant degree of control over foreign assets. Portfolio Investment involves purchasing ownership rights to foreign assets without gaining any significant control over the use of these assets. International financial flows have increased rapidly in the last 25 years as a consequence of the following: 1. International trade has expanded at roughly twice the rate of growth in real GDP. 2. International direct investment has grown at roughly 3 times the rate of real GDP. 3. International equity investment has grown at some 10 times the rate of growth of real GDP. Transnational Corporations Transnational corporations establish subsidiaries in other nations in order to establish production facilities 'offshore'. E.g. BP, Shell, Daimler, News Corp, NAB, BHP-Billiton. The phenomena of firms seeking growth through foreign subsidiaries is virtually a world wide trend as the development of global markets encourages firms to specialise in certain products in which they have expertise. Global Consumer Culture Consumers in high and middle income nations and even in some low income nations are claimed to be adopting global tastes. This is known as the Global Consumer Culture where foreign tastes and cultures are adopted by other nations. International Agreements Foreign Exchange Markets Participants in the foreign exchange market are: 1. Normal buyers and sellers who want to exchange some of their own funds. E.g. exporters, importers, tourists and travellers, firms moving funds for direct and portfolio investment proposes and governments either paying for imports or borrowing and repaying loans. 2. Intermediaries such as financial institutions who are providing services to their customers trading in foreign currency (most banks and merchant banks have licenses permitting them to buy and sell currencies and gain a profit by buying at a lower price than they sell at). 3. Speculators seek to make a profit by anticipating movements in exchange rates. If they feel that the $A is likely to fall against the $US they sell the $A and buy $US. When the $A falls in value they buy the $A and, if successful, have more $A than they started with. The Exchange Rate The exchange rate is the price of one currency in terms of another. E.g. AUD $1 = US $0.55 Since December 1983, Australia has used a floating or flexible exchange rate where the value of the Australian Dollar is determined by the forces of demand supply. Sources of Demand Sources of Supply 1. Demand and Supply residents buying Australian exports. 1. Australians buying imports. 2. All forms of capital inflow. 2. All forms of capital outflow. 3. Incoming foreign tourists. 3. Outgoing tourists from Australia. 4. Speculators. 4. Speculators. The above diagram, the exchange rate is AUD$1 = US$0.55 - at this price, demand equals the supply of the dollar at quantity OQe. At an exchange rate of 70c, S > D, causing the dollar to depreciate where D= S i.e. 55c. At an exchange rate of 40c, D > S, causing the exchange rate to appreciate to 55c where D = S. The Foreign Exchange market consists of those demanding Australian dollars for various reason and those supplying AUD$ for various reasons. The RBA also intervenes in the foreign exchange market and has done so since 1986 to smooth out fluctuations and test the market - this is called dirtying the float. Changes to Trade and Financial Flows Exports are an injection while imports are a leakage. A rise in exports, leads to rise in total sales of firms which encourages a rise in output (rise in GDP). Increased GDP will require more factors of production to be employed in production, and do an increase in income and encourage more consumption spending, more savings and more taxation revenue going to the government sector. Benefits of imports: - Consumers have access to a wider range of goods and services at perhaps different price and quality levels. - puts pressure on local firms to be efficient enough to compete against imports.
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