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7/28/2019 Economics Summary Notes1
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HSCEconomics2010SummaryNotes
JamieKennedy
LastUpdated22/12/2010
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TABLEOFCONTENTS
TheGlobalEconomy....................................................................................................................................................8
Featuresoftheglobaleconomy.............................................................................................................................8
Natureoftheglobaleconomyandglobalisation...............................................................................................8
TheGlobalEconomy........................................................................................................................................8
GrossWorldProduct.......................................................................................................................................8
Globalisation....................................................................................................................................................8
TheInternationalBusinessCycle...................................................................................................................10
Tradeandfinancialflows....................................................................................................................................11
ChangesInTheSize,PatternAndDirectionOfTradeAndInvestment........................................................11
TheForeignExchangeMarket........................................................................................................................11
TheMainParticipantsInForeignExchangeMarkets...................................................................................12
TheImpactOfChangesInTradeAndFinancialFlowsOnEconomies.........................................................12
Freetradeandprotection..................................................................................................................................12
TheBasisOfFreeTradeItsAdvantagesAndDisadvantages..................................................................12
ReasonsForProtection..................................................................................................................................13
MethodsOfProtectionAndTheEffectsOfProtectionistPoliciesOnTheDomesticAndGlobalEconomy
.........................................................................................................................................................................14
Contemporarytradingblocsandagreements..................................................................................................14
TheRole,ImportanceAndInfluenceInTheGlobalEconomyOfBlocsAndAgreements..........................14
EU,NAFTA,APEC,ASEAN,CERTA..................................................................................................................15
Internationalorganisations................................................................................................................................15
TheRole,ImportanceAndInfluenceInTheGlobalEconomyOfInternationalOrganisations..................15
WTO,IMF,WorldBank...................................................................................................................................16
ImpactOfGlobalisationOnTheStandardOfLivingInTheGlobalEconomy......................................................17
Variationsin
the
standard
of
living
in
the
global
economy
..............................................................................
17
IncomeAndQualityOfLifeIndicators...........................................................................................................17
Contrastsinlevelsofdevelopment...................................................................................................................17
DifferenceBetweenGrowthAndDevelopment...........................................................................................17
ReasonsForDifferencesBetweenNations...................................................................................................17
DevelopingEconomies,NewlyIndustrialisedCountries(NICS),TransitionEconomies,HighIncome
Economies.......................................................................................................................................................19
Impactofglobalisation.......................................................................................................................................20
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InternationalConvergence............................................................................................................................20
EconomicGrowth,DevelopmentAndTheQualityOfLife...........................................................................20
Trade,InvestmentAndTransnationalCorporations....................................................................................20
DistributionOfIncomeAndWealth..............................................................................................................21
EnvironmentalConsequences.......................................................................................................................21
FinancialMarkets............................................................................................................................................21
TheInternationalBusinessCycle...................................................................................................................21
ImplicationsForGovernmentEconomicPolicies..........................................................................................21
Casestudy...........................................................................................................................................................22
AcasestudyontheimpactofglobalisationonVietnam,alongwiththestrategiesthatVietnamisusing
topromoteeconomicgrowthanddevelopment.........................................................................................22
AustraliasPlaceintheGlobalEconomy....................................................................................................................23
AustraliasTradeAndFinancialFlows...................................................................................................................23
Value,CompositionAndDirectionOfAustraliasTradeAndFinancialFlows..................................................23
TrendsInAustraliasTradePattern...............................................................................................................23
TrendsInFinancialFlows...............................................................................................................................23
AustraliasBalanceofPayments........................................................................................................................24
Structure.........................................................................................................................................................24
Links
Between
Key
Balance
Of
Payments
Categories
..................................................................................
25
TrendsInTheSizeAndCompositionOfAustraliasBalanceOfPayments..................................................25
ReasonsForTheseTrends.............................................................................................................................25
Issuesassociatedwithtrendsinthebalanceofpayments..............................................................................26
TermsOfTrade...............................................................................................................................................26
SizeOfTheCurrentAccountBalanceAsAPercentageOfGrossDomesticProduct..................................26
ForeignDebtAndForeignLiabilities.............................................................................................................27
InternationalCompetitiveness.......................................................................................................................27
StructuralChange
In
The
Australian
Economy
..............................................................................................
27
Exchangerates.......................................................................................................................................................29
measurementofrelativeexchangerates.....................................................................................................29
FactorsAffectingTheDemandForAndSupplyOfAustralianDollars.........................................................29
ChangesInExchangeRates..........................................................................................................................30
DeterminationOfExchangeRatesIncludingFixed,FlexibleAndManagedRates....................................30
TheInfluenceOfTheReserveBankOfAustraliaOnExchangeRates........................................................30
TheEffectsOfFluctuationsInExchangeRatesOnTheAustralianEconomy.............................................31
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Freetradeandprotection......................................................................................................................................31
AustraliasPoliciesRegardingFreeTradeAndProtection...........................................................................31
TheImplicationsOfAustraliasPoliciesForIndividuals,FirmsAndGovernments......................................31
ImplicationsForAustraliaOfProtectionistPoliciesOfOtherCountriesAndInternationalOrganisations.
.........................................................................................................................................................................31
EconomicIssues.........................................................................................................................................................32
EconomicissuesintheAustralianeconomy.........................................................................................................32
EconomicGrowth...............................................................................................................................................32
AggregateDemandAndItsComponents:Y=C+I+G+XM..........................................................................32
InjectionsAndWithdrawals(I+G+X;S+T+M).................................................................................................33
TheSimpleMultiplier:K=1/(1MPC).............................................................................................................33
MeasurementOfGrowthThroughChangesInRealGrossDomesticProduct...........................................33
SourcesAndEffectsOfEconomicGrowthInAustralia................................................................................33
BusinessCycleTrends................................................................................................................................34
Unemployment...................................................................................................................................................34
Measurement..................................................................................................................................................34
Trends..............................................................................................................................................................35
TypesAndCauses:..........................................................................................................................................35
Natural
Rate
Of
Unemployment
...................................................................................................................
36
MainGroupsAffectedByUnemployment...................................................................................................36
EffectsOfUnemploymentEconomicAndSocialCosts..........................................................................36
Inflation...............................................................................................................................................................37
MeasurementCurrentAustralianBureauOfStatisticsMeasure............................................................37
Trends..............................................................................................................................................................37
Causes............................................................................................................................................................38
Effects............................................................................................................................................................38
PoliciesTo
Sustain
Low
Inflation
...................................................................................................................39
Externalstability.................................................................................................................................................39
Measurement..................................................................................................................................................39
Trends.............................................................................................................................................................40
CausesAndEffects.........................................................................................................................................41
Distributionofincomeandwealth....................................................................................................................41
MeasurementLorenzCurveAndGiniCoefficient....................................................................................41
SourcesOfIncomeAsAPercentageOfHouseholdIncome........................................................................42
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SourcesOfWealth..........................................................................................................................................43
DimensionsAndTrends,AccordingToGender,Age,Occupation,EthnicBackgroundAndFamily
Structure.........................................................................................................................................................43
EconomicAndSocialCostsAndBenefitsOfInequality................................................................................43
GovernmentPoliciesToAddressInequality.................................................................................................44
Environmentalmanagement............................................................................................................................44
EcologicallySustainableDevelopment..........................................................................................................45
PrivateAndSocialCostsAndBenefitsMarketFailure.............................................................................45
PublicAndPrivateGoodsFreeRiders.......................................................................................................45
Issues:.............................................................................................................................................................46
EconomicPoliciesandManagement.........................................................................................................................47
Economicobjectives...............................................................................................................................................47
EconomicGrowth...........................................................................................................................................47
FullEmployment.............................................................................................................................................47
PriceStability..................................................................................................................................................47
ExternalStability.............................................................................................................................................47
Environment..................................................................................................................................................48
DistributionOfIncome..................................................................................................................................48
Goals
of
government
policy
in
2010
..................................................................................................................
48
SustainingEconomicGrowthDuringTheGlobalRecessions......................................................................48
SupportingEmploymentDuringTheGlobalDownturn..............................................................................48
MaintainingStabilityAndInternationalConfidenceInAustraliasEconomyAndFinancialSystem.........48
KeepingInflationStable,WithinTheRangeOf23%....................................................................................49
BoostingAustraliasProductivityGrowthAndInternationalCompetitiveness.........................................49
IncreasingTheSustainableRateOfGrowthInTheLongTerm..................................................................49
PromotingEnvironmentalSustainability......................................................................................................49
Potentialconflicts
between
objectives
............................................................................................................
49
AchievingASimultaneousReductionInUnemploymentAndInflation.....................................................49
AchievingEconomicGrowthAndExternalBalance.....................................................................................50
OtherConflicts...............................................................................................................................................50
Themainpoliciesavailableforeconomicmanagement......................................................................................50
Macroeconomicpolicies....................................................................................................................................50
RationaleForMacroeconomicPoliciesStabilisationAndShiftsInAggregateDemand.......................50
Microeconomicpolicies.....................................................................................................................................50
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RationaleForMicroeconomicPoliciesIncludingShiftsInAggregateSupply,Efficiency..........................50
Fiscalpolicy.........................................................................................................................................................51
FederalGovernmentBudgetsAndBudgetOutcomes.................................................................................51
EffectsOfBudgetaryChangesOnResourceUse,IncomeDistributionAndEconomicActivity................51
MethodsOfFinancingDeficits.......................................................................................................................52
UseOfASurplus.............................................................................................................................................52
CurrentStanceOfFiscalPolicy......................................................................................................................52
ImpactOfRecentFiscalPolicy.......................................................................................................................52
Monetarypolicy..................................................................................................................................................53
PurposeOfMonetaryPolicy..........................................................................................................................53
Implementation
Of
Monetary
Policy
Reserve
Bank
Of
Australia
............................................................
53
ImpactOfChangesInInterestRatesOnEconomicActivity,ExchangeRate..............................................53
CurrentStanceOfMonetaryPolicy...............................................................................................................54
Structuralchange...............................................................................................................................................54
EffectsOfMicroeconomicPoliciesOnIndividualProductAndFactorMarketsAndTheEconomy..........54
RegulationAndDeregulation.........................................................................................................................54
Tradepolicy.........................................................................................................................................................54
DirectAndIndirectPoliciesToPromoteOrRestrictTrade..........................................................................54
TradeAnd
Industry
Policies
In
Australia
........................................................................................................
54
Pricesandincomespolicy..................................................................................................................................54
ReasonsForPricesAndIncomesPolicies......................................................................................................54
PossiblePricesAndIncomesPoliciesInAustralia.........................................................................................54
AdvantagesAndDisadvantagesOfCentralisedAndDecentralisedPolicies...............................................54
Labourmarketpolicies.......................................................................................................................................54
CurrentIndustrialRelationsFramework.......................................................................................................54
WorkPractices................................................................................................................................................54
DisputeResolution.........................................................................................................................................55
EducationAndTraining,EmploymentPrograms..........................................................................................55
Limitationsonpolicyimplementation...................................................................................................................55
TimeLags........................................................................................................................................................55
GlobalInfluences............................................................................................................................................55
PoliticalConstraints........................................................................................................................................55
Policyresponsesandtheireffectsindealingwiththeeconomicissues.............................................................55
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EconomicGrowth...........................................................................................................................................55
Unemployment...............................................................................................................................................55
Inflation...........................................................................................................................................................55
ExternalStability.............................................................................................................................................55
DistributionOfIncomeAndWealth..............................................................................................................55
ManagementOfTheEnvironment................................................................................................................55
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TheGlobalEconomyFEATURESOFTHEGLOBALECONOMY
NATUREOFTHEGLOBALECONOMYANDGLOBALISATION
THE GLOBAL ECONOMY
TradeinGoodsandServiceshadgrownrapidlyincreasingfrom38%ofGWPin1990to63%ofGWPin2007.
GWPisnow9timesthelevelin1950howeverthevolumeofworldtradehasgrown33timesits1950level
During
times
of
economic
downturns,
the
growth
of
global
trade
has
contracted
faster
than
world
economicoutputhighlightingthegreatervolatilityoftradecomparedtoGWP.
ImportantdevelopmentthathascontributedtotheseflowsistheincreasedinfluenceofTransnationalCorporations.
TransnationalCorporations:globalcompaniesthatdominateglobalproductandfactormarkets.TNCshaveproductionfacilitiesinatleasttwocountriesandareownedbyresidentsofatleasttwo
countries.
Tradehasalsoliftedinresponsetomajortradeagreements:o WorldTradeOrganisation(WTO): isanorganisationof153membercountriesthat
implementsandadvancesglobaltradeagreementsandresolvestradedisputesbetween
nations.Establishedin1995
o NorthAmericanFreeTradeAgreement(NAFTA)o AssociationofSouthEastNations(ASEAN)o EuropeanUnion(EU)
GROSS WORLD PRODUCT
GrossWorldProduct(GWP):thesumoftotaloutputofgoodsandservicesbyalleconomicsintheworldoveraperiodoftime.
Intheindustrialisedworldthevalueofwhatmanycountriesbuyandsellfromoverseasisgreaterthanhalfofthecountryseconomicoutput
GLOBAL ISAT ION
Globalisation:theprocessofincreasedintegrationbetweendifferentcountriesandeconomiesandtheincreasedimpactofinternationalinfluencesonallaspectsoflifeandeconomicactivity.
Involveslayersofinfluencesinalldirections Majorindicatorsofintegrationbetweeneconomicsinclude:
o Internationaltradeflowso Internationalfinancialflowso Internationalinvestmentflowsandtransfersoftechnologyo Themovementofworkersbetweencountries
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InternationalFinance
Financeisthemostglobalisedfeatureoftheworldeconomyasmoneycanmoveinsecondsaroundtheworld,farmorequicklythangoodsandservicesorpeople
Internationalfinanceflowshaveexpandedfollowingfinancialderegulationaroundtheworld(mainlyduringthe70sand80s)
Technologicalchangealsoplayedarolewithnewtechnologiesandglobalcommunicationallowingfinancialmarketstobelinkedthroughouttheworld.
InternationalfinancialflowshaveallshownadramaticincreaseduringtheglobalisationeraGrowthofinternationalinvestmentandtechnology
Anotherindicatorofglobalisationistherapidgrowthofinvestmentbetweencountriesoverthepast20years.
OnemeasureofglobalisationinvestmentistheexpansionofForeignDirectInvestment(FDI).o ForeignDirectInvestment(FDI):themovementoffundsbetweeneconomiesforthepurpose
ofestablishinganewcompanyofbuyingalargeportiononsharesinanexistingcompany
(10%+).FDIisconsideredtobealongterminvestment.
o FDIflowsarestronglyinfluencebythelevelofeconomicactivity.o FDIflowshaveheavilyfavouredthedevelopednationsoftheOrganisationforEconomicCo
operationandDevelopment(OECD).
Asignificantcauseofthegrowthofinternationalinvestmentistheincreasedlevelofinternationalmergersandtakeovers.
However,FDIin2007onlyaccountedfor18%oftotalinvestment,80%stillcamefromwithinnationaleconomies.
Technology
has
played
a
significant
role
in
the
expansion
of
trade
and
investment
between
countries.
Countriescanexporttheirtechnologiesandothercountrieshavetopayroyaltiesforthemuntilthey
areabletoproducethetechnologythemselves.
TheInternationalisationofthelabourmarket
Labourmarketsarefarlessinternationalised.Peopledonotmovejobsfreely. Arecenttrendinindustrialisedcountrieshastobecomemorerestrictiveaboutimmigrationofpeople
frompoorercountries.
WorldBankestimatesthat3%oftheworldspopulationhavemigratedtoworkindifferentcountriesintheworld.
Movementappearstobeatthetopandlowendofthelabourmarket.o Atthetopend,skilledworkersareattractedtojobsincountriesthatpayahigherincomeo Thebraindraineffectwhereskilledworkersleaveacountrytoworkinanothercountry.o Atthelowend,thereisdemandofunskilledlabourtoperformjobsthatpeoplebornlocally
maynotwanttoperform
Therearemanyrestrictionstothemovementoflabourincluding:immigrationrestrictions,culturalfactors,andeducationandprofessionalqualifications.
Shiftofbusinessesbetweeneconomies:justaspeoplemovetofindjobs,businessesmaymovetoothercountriestofindlabour.Producersmayoperateaglobalsupplychainwithproductionfacilities
inmanycountries.Thisiscalledoffshoringandallowsproducerstoreducecosts.Thismeansthat
exportorientedeconomiescancompeteduetolowlabourcosts.
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Factorsthatinfluencethebusinesscyclebutdifferbetweeneconomies:o Interestrates:aredeterminedbyeachcountry(butcanbeinfluencedbyothers)o Fiscalpolicy:significanteffectoneconomicgrowthintheshorttomediumterm.Setby
individualgovernments
(but
may
be
influenced
by
others)
o Exchangerates:differbetweencountriesandimpactontheleveloftradecompetitiveness.o Structuralfactors:differentlevelsofresilience,populationgrowthrates,regulations,
educationetc.
o Regionalfactors:someeconomiesarecloselyintegratedwiththeirneighboursandareinfluencedbytheeconomicperformanceoftheirmajortradingpartners
TRADEANDFINANCIALFLOWS
CHANGES IN THE S I ZE , PATTERN AND D IRECTION OF TRADE AND INVESTMENT
Globaltradeflowshavechangedduringtheglobalisationera,increasinginoverallsizeandasaproportion
of
world
economic
activity.
The
composition
and
direction
of
trade
flows
has
also
changed
duringrecentyears.
Compositionofinternationaltrade:themixofgoodsandservicesthatnationstradewitheachother.Mainlymanufacturedgoods.
Directionoftradeflows:Duringtheglobalisationera,highincomeeconomiessawtheiroverallsharefallwhichfastgrowingeconomiesinEastAsiaandthePacificsawtheirsharerise.
THE FOREIGN EXCHANGE MARKET
ForeignExchangeMarkets(FOREX):anetworkofbuyersandsellersexchangingoncecurrencyforanotherwherethevalueofacurrencyisexpressedintermsofanothercurrency(i.e.:theexchange
rate).
Thevalueofacountryscurrencyhassignificantimpactsupontheinternationalcompetitivenessofthecountry.
o Countrieswithovervaluedeconomiestendtoexperienceadeclineinexportso Currencyvaluescanalsoinfluencethelevelofinflationandinterestrateso Changesinthevalueofexchangeratesalsohaveaneffectonfinancialflowsintheshorttermo Ifalargernumberofinvestorsselltheirholdingsofacountryscurrencytomakeaquick
profit,itcandestabiliseanentireeconomy.
Factorsthatstrengthentheinternationalbusinesscycle
Factorstheweakentheinternationalbusinesscycle
Tradeflows Domesticinterestrates Investmentflows,investor
sentiments
Governmentfiscalpolicies Transnationalcorporations Otherdomesticeconomicpolicies Financialflows Exchangerates Technology Structuralfactors Globalinterestrates Regionalfactors Internationalorganisations
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THE MAIN PART IC IPANTS IN FOREIGN EXCHANGE MARKETS
Threemaincategories:speculators,traders,thosewhoaremakinglongterminvestments.o Currenciesareboughtandsoldtomakepossiblethepurchaseandsaleofgoodsandservices
betweenan
economy
and
other
economies.
Exporters
in
world
trade
want
to
be
paid
in
their
owncurrency;importersneedtobeabletoconverttheircurrencyintoaforeigncurrencyto
makeapayment.Thisonlyrepresentsasmallportionofoverallforeignexchange
transactions.
o ForeignInvestors:purchaseassetsinanothercountrysuchaspropertyorsharesandneedtoconvertintothelocalcurrency.Onlyrepresentsasmallamountofforeignexchange
transactions.
o Speculators:makeshorttermcurrencytradesthroughshiftingmoneyinandoutofacurrencyorthroughderivatives.Theaimistomakegainsfromshorttermmovementsinthecurrency.
Representsover95%ofthedailytradeonFOREXmarkets.
THE IMPACT OF CHANGES IN TRADE AND F INANC IAL FLOWS ON ECONOMIES
Shiftsintradewillaffectthestructureofadomesticeconomyovertime.o Ifaneconomyisexperiencingincreaseddemandforparticularexports,resourcesinthat
economywillshifttowardsincreasingtheproductionofthegoodorservice
o Ifaneconomyisexperiencingadeclineinoverseasdemandforagoodorservice,producersmayshiftresourcesawayfromtheproductionofthegoodorservice
o Trendsinthedirectionoftradecanhaveanimpactonindividualeconomies(i.e.:AustraliarespondingtotheincreasingdirectionoftradetoChina)
Changesinfinancialflowsintheshorttermcanhaveaneffectonthefinancialmarketsbutinthelongterm
they
can
have
a
substantial
effect
on
the
real
economy.
Theyhaveaneffectonconfidencewithinacountry.Weakconfidencemayslowdowntherateofeconomicgrowthandviceversa.
LargecurrencymovementscanalsodestabilisefinancialmarketsFREETRADEANDPROTECTION
THE BASIS OF FREE TRADE ITS ADVANTAGES AND D I SADVANTAGES
Fundamentalassumptionthattradeisagoodthingandthateconomieswillachievethefastestlevelofgrowthinafreetradeenvironment.
Freetrade:asituationwheregovernmentsimposenoartificialbarrierstotradethatrestrictthefreeexchange
of
goods
and
services
between
countries.
Argumentforfreetradeisbasedontheideaofcomparativeadvantage:o Comparativeadvantage:economicprinciplethatnationsshouldspecialiseinareasof
productioninwhichtheyhavethelowestopportunitycostandtradewithothernations.
o Opportunitycost:thealternativeuseofresources.Representsthecostofsatisfyingonewantoveranalternativewantthecostofthealternativeforegone.
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Advantagesoffreetrade advantagesoffreetrade
Allowscountriestoobtaingoodsandservicesthattheythemselvescannotproduceorinsufficientquantities.
Increaseinshorttermunemploymentasdomesticcompaniesfinditdifficulttocompete
Allowscountriestospecialiseintheproductionofgoodsandservicesforwhichtheyaremoreefficient
Moredifficulttoestablishbusinesses
Encouragestheefficientallocationofresources(allocationefficiency)whenspecialising
Productionssurplusesmaybedumped
Specialisationleadstogreatereconomiesofscaleloweringaveragecostsofproduction
Mayencourageenvironmentallyirresponsibleproductionmethodsifgoodsareproducedatalowercostduetoenvironmentallydamagingpractices
Internationalcompetitivenesswillincreaseasdomesticbusinessesfacegreaterinternational
pressure
increased
efficiency
Encouragesinnovationsthespreadoftechnologyandproductionprocesses
Leadstohigherlivingstandards,increasedconsumerchoice
REASONS FOR PROTECT ION
Protection:anytypeofgovernmentactionthathastheeffectofgivingdomesticproducersanartificialadvantageoverforeigncompetitors
Mainmethodsare:tariffs,importquotasandsubsidies Mostcountriestendtohavesomesortofprotectionofprotecttheirlocalindustries Thereareafewargumentsinfavourofprotection:
o Infantindustries:newindustriesfacemanydifficultiesandrisksintheirearlyyearssogovernmentsprotecttheseindustriesuntiltheyarelargeenoughtobemorecompetitive.
Thistypeofprotectionshouldonlybetemporary.
o Dumping:whenforeignfirmsattempttosellthisgoodsinanothercountrysmarketatunrealisticallylowprices.Thiscouldbeusedtogetridoflargesurplusestoestablishamarket
positioninanothercountry.Usingprotectionistmethodstopreventdumpingisoneofthe
fewacceptedargumentsbyeconomists.However,theWTOhasbeenquestioningifsome
countrieshavebeenabusingtheirentitlementtopreventdumpingbyfalselyaccusinglow
costproducers
of
dumping.
o Protectionofdomesticemploymentisoneofthemostpopularargumentsinfavourofprotectionisthatitsaveslocaljobs.Iflocalfirmsareprotectedagainstcheaperforeign
importsthendemandforlocalgoodswillbegreaterleadingtomoredomesticemployment.
o Defenceandselfsufficiencyisoneofthenoneconomicreasonsthatacountrymaywanttoretaincertainindustries.Forexample,theUSwouldwanttoretainitsdefenceproductionin
timesofwartoensurethatithasreadyaccesstodefenceequipmentintimesofwar.Japan
placeshightariffsonriceimportsbecausetheywanttoprotecttheirlocalindustrytoensure
thattheyhaveareliablesupplyoffoodifeverablockadewereplacedonit.
Otherfactorscaninclude:
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o Tradeunionsagainstlowcostlabourfromothercountrieso Environmentalfactorssuchastheenvironmentalhazardinvolvedintheproductionofsome
goods.
o Spillovereffectsthatcertainindustriesmayhaveonotherindustrieswithinacountry.METHODS OF PROTECT IONAND THE EFFECTS OF PROTECT IONISTPOLIC IES ON THE DOMEST IC AND GLOBAL ECONOMY
Tariff:agovernmentimposedtaxonimports.Ithastheeffectofraisingthepriceoftheimportedgoodmakingthedomesticproducermorecompetitive.
Quotas:controlthevolumeofagoodthatisallowedtobeimportedoveragivenperiodoftime.Thismeansthatthedomesticproducersareguaranteedashareofthemarket
Subsidies:involvefinancialassistancetodomesticproducerswhichenablesthemtoreducetheirsellingpriceandcompetemoreeffectivelywithimportedgoods.Economistsgenerallyprefer
subsidies
instead
of
tariffs
as
it
is
government
expenditure
and
not
a
tax
so
it
will
be
more
likely
to
be
reviewed.
VoluntaryExportRestraints:Aspartoftradenegotiations,somecountriesmayvoluntarilyagreetorestrictthenumberofexportstoanothercountryinreturnforasimilarconcession.
LocalContentRules:Specifythatagoodmustcontainaminimumpercentageoflocallymadeparts.Inreturn,theimportedgoodwillnotattractatariff.
Exportincentives:programsthatgivedomesticproducersassistancesuchasgrants,loansortechnicaladvicetoencouragebusinessestopenetratetheglobalmarketorexpandtheirmarketshare.
CONTEMPORARYTRADINGBLOCSANDAGREEMENTS
THE ROLE , IMPORTANCE AND INFLUENCE IN THE GLOBAL ECONOMY OF BLOCS AND AGREEMENTS
Countrieshaveformedagreementstoattempttogainfromgrowingtradeopportunitiesandavoidbeingexcludedfromregionaltradingblocs.
Twomajortypesexist:o Preferentialfreetradeagreements(regionalorbilateral)o Multilateralagreementswhichareopentoallnations
AtradingblococcurswhenmultiplecountriesjointogetherandformapreferentialtradeagreementtotheexclusionofothercountriessuchastheEuropeanUnion
Freetradeagreementsareformalagreementsbetweencountriesdesignedtobreakdownbarrierstotrade
between
those
nations.
The
agreement
is
said
to
be
bilateral
when
it
is
between
two
countries
andregionalwhenitisbetweenthreeormorecountriesinclosegeographicalproximity.
ThesepreferentialfreetradeagreementsdonotbenefitnonmembersanddonotcreateabetterenvironmentforfreetradeatallwhereasmultilateralagreementsconductedthroughtheWTOare
designedtobreakdownalltraderestrictionsandfreeupworldtrade.
Manyeconomistsarguethatregionalandbilateraltradeagreementsthatleadtotheformationoftradingblocsandhindertheprogressofworldtradebecausetheyslicetheworldupintoseparate
tradingareas.Othereconomistsarguethatregionaltradingagreementsareasteppingstonetowards
freetrade.
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RegionaltradeagreementshavegrowninrecentdecadeswithMongoliatheonlyWTOcountrythatisnotasignatorytoaregionalorbilateraltradeagreement.Economistshavetermedthisregionalisation
insteadofglobalisation.
Regionaltradeagreementshavenotdonemuchtohelpsmallerdevelopingcountriesaccessingrichcountriesmarkets.Regionaltradeagreementstendtoentrenchglobalinequalities.
EU, NAFTA, APEC, ASEAN, CERTA
APEC(AsiaPacificEconomicCooperation)Forum:madeupof21membernationsintheAsiaPacificestablishedinresponsetootherregionaltradingblocssuchastheEUandNAFTA.Accountsfor40%of
theworldspopulation,53%oftheworldGDPand48%ofworldtrade
EU(EuropeanUnion):MembercountriesspanacrossEuropewith27membercountries.TheaimistohaveasinglemarketforEuropeangoodsandserviceshowevertheEUhasalsoraisedtariffsagainst
nonmembercountries(resultinginaccusationsthattheEUisaclosedtradingbloc).Itsprotectionist
methods
have
forced
other
larger
players
(such
as
the
US)
to
response
with
similar
methods
forcing
outsmallerplayerssuchasAustralia.
NAFTA(NorthAmericanFreeTradeAgreement):wasestablishedin1994inwhichagriculturalprotectionisbeingcompletelyeliminatedandothertariffsarebeingphasedoutoveraperiodof515
years.NAFTAhasresultedinasignificantincreaseintradeamongitsmemberswithaccesstotheUS
resultinginsignificantexportsforothermemberswhiletheUShasbenefittedbyaccessingthe
cheaperlabourmarketsavailableinsomeoftheothermembernationssuchasMexico.
BilateralTradeAgreements:agreementsbetweentwocountriessuchasCloserEconomicRelationsTradeAgreement(CERTA)betweenAustraliaandNZwhichhasledtotheeliminationoftrade
restrictionsbetweenthetwocountries.CERTAhasbeenextendedinrecentyearstoincludebusiness
regulationsandtaxlaws
ASEAN(AssociationofSouthEastAsianNations):coverstheNIEsinSouthEastAsiabutdoesnotincludeanyofthelargeeconomies.ASEANisacounterweighttoAPEC.
INTERNATIONALORGANISATIONS
THE ROLE , IMPORTANCE AND INFLUENCE IN THE GLOBAL ECONOMY OF INTERNAT IONALORGANISAT IONS
Oneoftheproblemscreatedbyglobalisationistheinabilityofdomesticinstitutionstoregulatetheincreasingcomplexnatureofbusinesstransactions.Manyeconomicproblemscanonlybeaddressed
atagloballevelsuchas:
o Managingglobalinstabilityinfinancialmarketso Providingeconomicassistanceo Developingglobalstandardsforenvironmentalprotectiono Freeingupworldtradeandresolvingtradedisputes
Inthelongterm,theglobaleconomywillneedastrongglobalinstitutiontodealwiththeseproblems.However,todaytherearethreemajorinstitutionsintheglobaleconomy.Theseare:
o WTO:WorldTradeOrganisationo IMF:InternationalMonetaryFundo WorldBank
Inadditionthereareseveralothergroups:
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o G8:GroupofEightnationso WorldEconomicForumo UNbodies
WTO, IMF, WORLD BANK
WTO(WorldTradeOrganisation):o 153membernationsin2009o RoleoftheWTOistoimplementandadvanceglobaltradeagreementsandtoresolvetrade
disputes.
o Generallyeffectiveinitstask.o QuestionsraisedabouttheWTOdisputeresolutionmechanismasshownbytheUSandEU
lodgingappealsanddelayinganyrulings.
o RecentfocushasbeenontheDohaRoundoftradeliberalisationhowevertherehavebeenmanydisagreementsandtalksbrokedownin2008.
IMF(InternationalMonetaryFund):o Consistsof186memberso Roleistomaintaininternationalfinancialstabilityparticularlyintheforexmarketso IMFplaysaroleinminimisingtheimpactsofafinancialcrisisanywherearoundtheworldo Playedasignificantroleduringthe2008GFCbysuspendinginterestpayments,injectingcash
intotheglobaleconomytopromoteliquidity.
o IMFsupportsthefreetradeofgoodsandservicesandoftenrequirescountriestostructurallychangetheirpolicybeforereceivingfinancialassistancefromtheIMF.Thestructural
adjustmentpolicieshaveplayedakeyroleintheglobalisationprocess
o IMFhasbeencriticisedforsometimesformakingincorrectdecisionseg:demandingthatgovernments
adopt
a
contradictory
macroeconomic
policy
during
the
Asian
Financial
Crisis
of
the1990s
WorldBank:o Roleisprimarilyconcernedwithhelpingpoorercountrieswiththeireconomicdevelopment.
Fundinvestmentforinfrastructure,reducepoverty,helpcountriesadjusttheireconomiesto
thedemandsofglobalisation
o Fundedbycontributionsfrommembercountriesanditsownborrowingso Makesloanstodevelopingcountriesatbelowstandardrateso Recently,themajoraim(aspertheMillenniumDevelopmentGoals)hasbeentoreducethe
proportionofpeoplelivingonlessthan$1/dayaswellasachieveuniversalprimaryeducation,
reduce
child
mortality,
preserve
the
natural
environment,
improve
the
status
of
women.
o SupportofHeavilyIndebtedPoorCountriestoreducedebtby2/3oftheworldspoorestcountries.
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IMPACTOFGLOBALISATIONONTHESTANDARDOFLIVINGINTHEGLOBALECONOMY
VARIATIONSINTHESTANDARDOFLIVINGINTHEGLOBALECONOMY Despitetheadvancesoverthepastcentury,thereareharshinequalitiesbetweenwealthyandpoor
countries:
o 1.4billionpeopleliveinextremepovertyonlessthanUS1.25/dayo Richest5%ofpeopleintheworldearn165xtheincomeofthepoorest5%o 30,000childrendieeachdayfrompovertyrelatedpreventablediseases
However,livingstandardshavebeenimprovinginbothdevelopinganddevelopednations:o Between19822005thoselivinginextremepovertyfellfrom52%to25%o Lifeexpectancyindevelopingnationsfrom56to67yearsbetween1970and2007o Primaryeducationcompletionrateincreasedindevelopingcountriesto85%in2007
INCOME AND QUAL ITY OF L I FE INDICATORS
Themostpopularmethodtocomparelivingstandardsbetweennationsistocompareincomeasitmeasurestheabilityofcitizenstosatisfytheirneeds.
GrossNationalIncome(GNI)isthesumofvalueaddedbyallresidentproducersinaneconomyplusreceiptsofprimaryincomefromforeignsources.
RealGNIiscalculatedbyaccountingfortheeffectsofinflation PurchasingPowerParity(PPP):usedtomakeadjustmentsbeforecomparingtheGNIbetween
countries.PPPadjustsmeasurementsofthesizeofaneconomytoreflectthepurchasingpowerof
currencieswithinanationaleconomy.
ThesizeofthepopulationandrateofpopulationgrowthvarybetweencountriesandallowancescanbemadebydividingtherealGNIofeachcountrybyitspopulationGNIpercapita.
HumanDevelopmentIndex(HDI):AnalternativetotheGNIistheHDItomeasureeconomicdevelopment.Ittakesintoaccount:
o Lifeexpectancyatbirth:Indicativeofthehealthandnutritionstandardsofacountryo Levelsofeducationattainment:HDImeasuresadultliteracyandratioofpeoplethathave
completedprimary,secondaryandtertiaryeducation
o GDPpercapita:Usedasameasureofadecentstandardoflivingandisessentialindeterminingaccessthatpeoplehavetogoodsandservices
CONTRASTSIN
LEVELS
OF
DEVELOPMENT
D I FFERENCE BETWEEN GROWTH AND DEVELOPMENT
EconomicgrowthissimplyapercentageincreaseinGDP/capita Economicdevelopmentisbroadmeasureofwelfareinanationthatincludesindicatorsofhealth,
education,andenvironmentalqualityaswellasmateriallivingstandards.
REASONS FOR D I FFERENCES BETWEEN NATIONS
GlobalFactors:
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GlobalTradeSystem:Somefeaturesoftheglobaltradesystemreinforceratherthanreduceglobalinequalities
o Westerneconomiesprotecttheirdomesticagriculturesectorbecauseitisnotcompetitivewith
producers
in
developing
nations.
Developing
countries
experience
high
levels
of
global
protectionismintheagriculturalsector.
o ExpandingregionaltradeblocssuchastheEUandNAFTAexcludepoorernationsfromaccesstotheselucrativemarkets.Thishasanenormousimpactonpoorcountries.
o HighincomenationshaveresistedmakingconcessionsonissuesthatwouldprovidegreatbenefittodevelopingcountriessuchasattheDohaRound.Theycanthenuseregionaland
bilateralagreementstogainaccesstomarketswheredevelopingnationscannotbargainasa
group.
o BenefitsoffreetradeagreementsarenotalwaysavailabletodevelopingnationsduetothehighcostsofadministrationandthecomplexityoftheWTOsprocedures.
GlobalFinancialArchitecture:o Longterminternationalflowsofinvestmentheavilyfavourdevelopedcountries.Highincome
economiesreceivedaround2/3ofallFDIin2007
o Shorttermfinancialflowsoftenfavourthoseemergingmarketsthatofferbetterreturnsforspeculatorshowevertheseareasalsoexperiencethegreatesteconomicvolatilitywhich
cansetbackeconomicdevelopmentdecadeswhilespeculatorsmoveontoothermarkets.
o TheIMFiscriticisedthatitsstructuraladjustmentpoliciesservetheinterestsofhighincomeeconomies.
o Asaresultofgreateraccesstofinancialmarkets,manydevelopingcountrieshavemassiveforeigndebtburdensirresponsiblelendingpractisesbyrichcountryfinancialinstitutions.
GlobalAidandAssistance:o Thetotallevelofdevelopmentaidprovidedbyhighincomeeconomieswasonly0.3%ofGWP
in2008.Thisleveliswellbelowthegoalof0.7%ofGDPthathighincomeeconomieshave
beencommittedto.Thereisalsoariskthathighincomeeconomiesmaycutaidtohelppay
offthedeficitscausedbytheGFC.
o Criticsclaimthatthemajorityoftheaidgivenisphantomaidaidthatdoesnotimprovethelivesofthepoor.Moneyisspentonpayingfortechnicalcooperation(consultants)as
wellasbeingwastedonadministrationcosts
o Thedistributionofaidusuallyrepresentsstrategicandmilitaryconsiderationsratherthantheneedoftheworldspoorestcountries.
GlobalTechnologyFlows:o
High
income
economies
choose
the
priority
areas
of
scientific
research
and
development.
Muchofthistechnologydealswiththehealthproblemsofanageingpopulationinrich
countriesandlittletodowithpoornationswhosehealthrisksinvolvecommoninfectious
diseases.
o Developingnationsfinditdifficulttogainaccesstonewtechnology.IPrightsrestrictthebenefitsoftechnologicaltransfertopoornationsbecausetheycannotpaydeveloped
countrypricesforthetechnology.
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DomesticFactors:
EconomicResources:o Naturalresources:areimportantinputsfortheproductionofhighervalueadded
manufacturedgoods
and
services.
Economies
that
have
an
abundant
and
reliable
supply
of
cheapnaturalresourceshavebetteropportunitiesforeconomicdevelopmentthanthose
whodonot.Abundanceofnaturalresourcesmayalsobeanegativewhichcanhampera
countryseconomicdevelopmentifitleadstoanovervaluedexchangerate,narrowexport
baseandbecomingoverreliantonasmallnumberofindustriestodriveeconomicgrowth
o Laboursupplyandquality:Labourisanimportantfactorinbecomingthemostimportantinputtotheproductionprocess.Highincomeeconomiestendtohavehighlyeducatedand
skilledlabourresourceswhereaslowincomenationsarecharacterisedbyhighpopulation
growth,pooreducationlevelsandlowhealthstandardswhichreducesthequalityoflabour.
o Accesstocapitalandindebtedness:Difficultyingainingaccesstocapitalforinvestmentanddevelopment
in
low
income
nations
also
contributes
to
lowered
living
standards.
Low
levels
ofsavingsarelargelyaresultoflowincomelevelsandthiscreatesaselfperpetuatingcycleof
lowinvestmentlevelsandslowexpansion.Enterprisesincountrieswithhighlevelsofforeign
debtoftenfinditdifficulttogainaccesstofunds.
Entrepreneurialculture:o Evidencesuggeststhatacountryshistoryandsocialinstitutionscanimpactonitseconomic
successsuchasthevaluesofindividualresponsibility,enterprise,wealthcreationandastrong
workethic.Thesevaluescanassiststheindustrialisationprocesstowardssustainable
economicdevelopment
Institutionalfactors:o Institutionalfactorsinindividualeconomiescanhaveinfluencesforbusinesses.Political
instability,corruption,andlawoflawenforcementtendtoundermineinvestorconfidence
whowillbereluctanttoundertakerisksiftheybusinessinterestsarethreatenedby
inadequatestructureforresolvinglegaldisputes.
DEVELOPING ECONOMIES , NEWLY INDUSTR IAL ISEDCOUNTRIES (NICS), TRANS IT IONECONOMIES , H IGH INCOME ECONOMIES
DevelopingEconomies:Thesecountriessufferfromlowincomelevels,weakhumanresourcesandhaveonlyexperiencedlimitedindustrialisation.Alargenumberofpeopleliveinabsolutepoverty(less
thanUS1.25/day).
o Highlevelsofincomeinequalityo Dependenceonagriculturalproductionforincome,employmentandtradeo Relianceonforeignaidanddevelopmentassistanceo Lowlevelsoflabourproductivity,industrialisation,technologicalinnovationand
infrastructuredevelopment
o Weakpoliticalandeconomicinstitutions NewlyIndustrialisedCountries:Economiesexperiencingrapideconomicchangeandintransitionfrom
beingdevelopingeconomiestohighincomeeconomies.NICshavebeenthefastestgrowinggroupof
economiespursuinggrowththroughexportleddevelopmentandencouraginglargeinwardflowsof
FDI.
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TransitionEconomies:Weresocialisteconomiespriortothecollapseofsocialism.Theseeconomieshaveattemptedandextraordinarytransformationfromcentrallyplannedeconomiestomarket
economies.Reformsincludeprivatisationofstateownenterprises,financialmarketliberalisationand
shifttowards
western
style
economic
and
political
institutions
HighIncomeEconomies:Countrieswithhighlevelsofeconomicdevelopmentandcloseeconomictieswitheachotheraswellasliberaldemocraticpoliticalandeconomicinstitutions.Highincome
countrieshaveaGNIpercapitaaboutUS$11,906.Includes27/30oftheOECDcountries.
IMPACTOFGLOBALISATION
INTERNAT IONALCONVERGENCE
Globalisationappearstobecontributingtoaconvergenceinlivingstandards.Overthelastfewdecades,developingeconomieshavebeencatchinguptodevelopedhighincomeeconomies.
TransitioneconomiesarenowgrowingfasterandeconomicgrowthinthefirstwaveofNIEshasslowednowthatlivingstandardsinthosecountrieshaverisentosimilarlevelsasforhighincome
economies.
ECONOMIC GROWTH , DEVELOPMENT AND THE QUAL ITY OF L I FE
Globalisationissaidtoofferthenationsoftheworldtheopportunitytoexperienceeconomicgrowthanddevelopmentandtoimprovethequalityoflifefortheircitizenshowever,notallcountrieshave
benefittedequallyfromglobalisation.
Thewinnersfromglobalisationarethosecountriesthathaveembracedinternationaltrade,foreigninvestmentandtheparticipationofTNCshoweversomefeaturesofglobalisationhavehadnegative
impactsontheglobaleconomy.Forexample,countriesinAfricahavesufferednegativegrowthdueto
highlevels
of
foreign
indebtedness.
Ifglobalisationraiseseconomicgrowthandthereforeraisesincomelevelsthenthiscanhaveapositiveeffect.Ifhowever,thedistributionofincomeisuneventhenthiswillhaveanegativeeffecton
thequalityoflife.
TRADE , INVESTMENT AND TRANSNAT IONALCORPORAT IONS
Theprocessofglobalisationhasresultedinsubstantialincreasesinthesizeoftradeflowsandforeigninvestment.BecauseofthekeyroleplayedbyTNCsintradeandinvestmentflows,theyare
increasinglydominatingbusinessactivityaroundtheworld.
Duetothenatureoftheglobaleconomy,therecanbemultipleinternationaltradetransactionsintheprocess
of
manufacturing
a
good.
Theglobalisationoffinancialmarketshasseenanincreasedrelianceonforeignsourcesoffinanceforinvestment.FDIisnowplayingagreaterroleincreatingmoreeconomicactivityaroundtheworld.
However,theflowisFDIfundsareusuallytargetedatthosecountrieswithfavourableeconomicprospectsandonlyatrickletothoseLDCs(LeastDevelopedCountries).
AmajorcriticismofTNCsisthatbecausetheydonotoperateunderthelawsofonecountry,theycanmoveproductionfacilitiestocountrieswithweakgovernmentregulations.
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D I STR IBUT IONOF INCOME AND WEALTH
Globalisationhasresultedinincreasedworldincomeandwealthbutthedistributionofthisincreasehasbeenveryunequal.Anumberofcountrieshavegainedverylittleorevennothingfrom
globalisation.
EventhoughincreasedFDIflowsfueleconomicgrowth,theytendtobefocusedonthehigherskilledandtechnologysectorsfavouringthosewhoarealreadybetteroffincreasedinequality.
Globalisationhasincreasedopennesstotradewhichprovidesmoreexportopportunitiesraisingtheincomeofagriculturalworkersindevelopingcountries.Alowertariffonimportsreducesthepricesof
goodsandimproveslivingstandards.
ENVIRONMENTAL CONSEQUENCES
Globalisationcanhaveanegativeimpactontheenvironment.Developingcountriesmayengageineconomicbehaviourthatisdetrimentaltotheenvironmenttoattractforeigninvestors.
Globalisationalsooffersthechancetoprotecttheworldsenvironmentfromharmbyforcingcountriestoownuptotheirenvironmentalresponsibilities.
Itmakesthecostsofpreservationabletobesharedandfacilitatesthetransferofenvironmentallyfriendlytechnology.
F INANCIAL MARKETS
Financialmarketsshiftlargeamountsofmoneyveryquicklyandthiscansometimeshavedevastatingeffectswhenasuddenlossinconfidencearises.Theexchangeratecancollageleadingtoashockin
theeconomy,recession,risingunemploymentandincreasedpoverty.
Thefinancialmarketsbehaveinunpredictablewaysandthiscanposealargethreattotheglobaleconomy
like
a
giant
wrecking
ball.
THE INTERNAT IONALBUS INESS CYCLE
Closelinkagesbetweeneconomiesholdbothbenefitsandrisks:o Benefits:achievefasterratesofgrowthbyspecialisationandengagingintradeo Risks:exposedtodownturnsintheinternationalbusinesscyclesanddevelopmentsinthe
region.
IMPLICAT IONSFOR GOVERNMENT ECONOMIC POLIC IES
Globalisationhasledtogreatersimilarityofeconomicpoliciesaroundtheworld.TheWashingtonConsensus
outlines
market
friendly
policies:
o Fiscaldisciplineo Redirectionofpublicexpendituretowardseducation,healthandinfrastructureinvestment.o Taxreformbroadeningthetaxbaseandcuttingmarginaltaxrateso Interestratesdeterminedbymarketforcesandarepositivebutmoderateo Competitiveexchangerateso Tradeliberalismo Opennesstoforeigndirectinvestmento Privatisationofstateenterprises
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o Deregulation:suchasthosethatimpedeentryorrestrictcompetitionexceptforthosejustifiedonsafety,environmentalandconsumerprotectiongrounds.
o LegalsecurityforpropertyrightsCASESTUDY
A CASE STUDY ON THE IMPACT OF GLOBAL ISAT IONON V I ETNAM, ALONG WITH THE STRATEG IES THAT V I ETNAM I S US ING TO PROMOTE ECONOMIC GROWTH AND DEVELOPMENT
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AustraliasPlaceintheGlobal
Economy
AUSTRALIASTRADEANDFINANCIALFLOWS
VALUE,COMPOSITIONANDDIRECTIONOFAUSTRALIASTRADEANDFINANCIALFLOWSTradingPartner %ofAustralianImports %ofAustralianExports
USA 12 5
EU 21 10
ASEAN
20
9
China/HongKong 18 19
SouthKorea 3 8
Japan 8 23
NewZealand 3 4
TRENDS IN AUSTRAL IA S TRADE PATTERN
AustraliaprimarilytradedagriculturalgoodsasacountrytonationssuchastheUnitedKingdomandotherEuropeanNationsduetoourtraditionalroots.However,whentheUKjoinedtheEUitwas
requiredtoimposetariffsonAustralianexports.
Afterthis,AustraliachangedthefocusofexportstothedevelopingcountriesinSouthEastAsiawhichrequiredresourcestogrow.
Ourexportshavedecreasedintheagriculturalsector(asapercentageoftotalexports)buthaveincreasedsignificantlyintheminingandresourcessectorwithashiftawayfromcountriessuchas
JapantowardsChinaandotherASEANcountries.
AlthoughwestillexporttotheEU,UKandUSwemainlyimportfromthesecountries(aswellascountrieslikeChinaandJapan)
TRENDS IN F INANC IAL FLOWS
Duetoglobalisationandthefloatingofcurrenciesaroundtheworld,therehasbeenanincreasedamountofforeigninvestmentintoAustralia.
Globalisationandtechnologyhasallowedthetransferofmoneyveryquicklyaroundtheglobebenefittingforeigninvestment(ascapitalmoveseasilybetweennations).
Australiahasalwaysbeenanetcapitalimporter.ThefinancialflowsintoAustraliaareabouttwicethatofflowsoutofAustraliareflectingonthelackofdomesticsavingsinAustralia.
Arecenttrendhasbeentheshiftinthecompositionoffinancialflowsbetweendirectinvestmentandportfolioinvestment.Duringthe1980s,directinvestmentwasgreaterthanforeigninvestmentas
governmentsregulatedfinancialflows.Today,thereverseistruewiththeremovalofrestrictions
injectingmoneyintoAustraliancompaniesthroughloansandsharepurchases.
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AUSTRALIASBALANCEOFPAYMENTS ThebalanceofpaymentssummariesallthetransactionsthatAustraliahaswiththerestoftheworld
overaperiodoftime.
STRUCTURE
CurrentAccount
Thecapitalaccountshowsthemoneyflowfromallexportsandimportofgoodsandservices,incomeandcurrenttransfersforaperiodoftimeinoneyear.Itessentiallycoversallexternaltransactionsthat
arenotreversible.
Netgoods:ReferstothedifferencebetweenwhatAustraliareceivesforitsexportsandpaysforitsimports.
Netservices:Referstotheservicesthatareboughtandsoldwithoutpeoplereceivinganactualgoodsuch
as
transport,
telephone
calls,
accommodation.
Services
Australia
sells
are
an
inflow
and
services
Australiabuysareanoutflow.
Balanceongoodsandservices:Arrivedatbyaddingnetgoodsandnetservices NetIncome:Referstoearningsoninvestmentscoveringinterestpaymentsonborrowingsandreturns
onotherforeigninvestments.WhenforeignersinvestinAustralia,incomeflowsoverseas(debits).
WhenAustraliansinvestabroad,thereisaflowofmoneybackintotheAustralianeconomy(credit).
Netcurrenttransfers:occurwhenproductsorfinancialresourcesareprovidedwithoutaspecificgoodorservicebeingprovidedinreturn.
Balanceoncurrentaccount:Additionofthebalanceongoodsandservices,netincomeandnetcurrenttransfers.
Capitaland
Financial
Account
TheCapitalandFinancialAccountisconcernedwithfinancialassetsandliabilitiesthemoneyflowsthatresultfrominternationalborrowing,lendingandpurchasingofassets.Thesetransactionsare
reversible.
CapitalAccount:Consistsofcapital(money)transferswiththreemainparts:o CapitaltransfersfrompeoplemigratingintooroutofAustraliao Capitaltransfersintheformofforeignaidtoothercountrieso Purchaseandsaleofnonproduced,nonfinancialassetssuchasintellectualproperty.
FinancialAccount:showsAustraliastransactionsinforeignfinancialassetsandliabilitiesandischaracterisedbyfourtypesofinvestment.Creditsrepresentnetinflowssuchasincreasedforeign
investmentin
Australia
or
reduced
foreign
investment
overseas.
Debits
represent
net
outflows
and
Australiaconsistentlyrecordsapositivefinancialaccountbalanceaswedrawonthesavingsofthe
restoftheworldtofinanceadeficitonthecurrentaccount.
o Directinvestment:ForeignfinancialtransactionstofundnewinvestmentinAustraliaoroverseasortobuymorethan10%ofsharesinexistingAustraliancompanies
o PortfolioInvestment:Buyingofland,shareandothermarketablesecuritiesinexistingcompanies(mostforeigndebtrecordedhere).
o Otherinvestment:investmentnotcapturedinothercategoriessuchasloans,deposits,tradecredits
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o ReserveAssets:Foreignassetsthatareavailabletoandcontrolledbythecentralauthoritiesforfinancingorregulatingpaymentimbalances.GoldheldbytheRBA,FOREXheldbythe
RBA,SpecialDrawingRights.
Balanceoncapitalandfinancialaccount:addingthecategoriestogether.TheamountshouldbeapproximatelyequaltothedeficitontheCA.
L INKS BETWEEN KEY BALANCE OF PAYMENTS CATEGORIES
$ = $
Supplyisrepresentedby:
Paymentsforimportsofgoodsandservices(M) Income/transfersoverseas(Ydebits) Capitalandfinancialoutflow(Koutflow)
Demandisrepresentedby:
Receiptsforexportsofgoodsandservices(X) Incometransfersoverseas(Ydebits) Capitalandfinancialinflows(Kinflow)
+ + = + +
+ =
=
Overaperiodoftime,ahighlevelofKFAsurpluseswillresultinawideningCADbecauseoftheservicingcostsassociatedwithincreasedforeignliabilities.TheViciousCycleofAccumulatingDebt.
TRENDS IN THE S I ZE AND COMPOSITION OF AUSTRAL IAS BALANCE OF PAYMENTS
TheBalanceofPaymentsisakeyindicatorofthehealthofaneconomy.AustraliahasexperiencedconsistentlylargeCADsincethemid1980s.Eachyear,Australiahaspaidoutmoreforgoods,services
andotherincomeandtransferpaymentsthanithasreceived.
ThedegreetowhichahighCADissustainableissubjectofgreatdebate.AhighCADcouldresultfromhighlevelsofdirectinvestmentthatallowsforhighereconomicgrowthandexportsinthelongterm.
TheCurrentAccountBalanceandBalanceongoodsandservicesisheavilyinfluencebycyclicalfactorssuchaschangedinglobaldemandforcommoditieshoweverthelongtermstructuralcomponentof
theCAD,thenetincomedeficit,remainshighregardlessofthecyclicalswingsintheCAD.
REASONS FOR THESE TRENDS
TherearemanyreasonsforhavingahighCAD.Someeconomistsbelievethatduringthemid80sand90sAustraliaslackofinternationalcompetitiveness(i.e.:thecurrentaccount)ledtothecurrent
situationweareinnow.
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Recently,therehasbeenafocusonthelackofdomesticsavinglevelsbecauselowsavingsmeansthatforeigncapitalinflowsarerequiredtofindinvestmentinAustralia(i.e.:acapitalandfinancialaccount
problem)
ISSUESASSOCIATEDWITHTRENDSINTHEBALANCEOFPAYMENTS TherearesomeassociatedrisksofrunningahighCAD:
o Thegrowthofforeignliabilities:contributetoanincreasedlevelofforeignliabilityovertime.LendersmaybecomemorereluctanttolendtoAustraliaorinvestinAustralia.Decisionsmade
thataffectAustraliawillbecomeincreasingmadebyinternationalbusinesses.
o Increasedservicecosts:AhighlevelofforeignliabilityimposessubstantialservicingcostslargernetincomedeficitonCAD.Higherlevelsofforeigndebtcanresultinforeignlenders
demandriskpremiumsonloans(i.e.:higherinterestrates).Thereisariskoffallingintothe
debttraporVCADwhereweneedtoborrowmoremoneytoserviceourforeignliabilities.
o Increasedvolatilityforexchangerates:ThismayunderminetheconfidenceofoverseasinvestorsintheAustralianeconomy.Thisreduceddemandforcurrencymaydepreciatethe$A
leadingtoincreasedimport/decreasedexportpriceswhichinturnworsenstheCAD
o Constraintonfutureeconomicgrowth:ahighCADcansloweconomicgrowthinthefutureashigheconomicgrowthusuallyinvolvesanincreaseinimportsleadingtodeteriorationinthe
CAD.EconomieswithaCADproblemlimitgrowthtokeeptheCADsustainable(knownasthe
balanceofpaymentsconstraint).
o Morecontractionaryeconomicpolicy:IftheCADneedstobereducedintheshortterm,macroeconomicpolicyneedstobetightenedwhilemicroeconomicpolicyneedstobe
reformed.TighterfiscalpolicycanalsolowertheCADbutalsoreduceeconomicgrowth.In
thelongterm,sloweconomicgrowthcanleadtoincreasedunemployment.
o LossofInternationalInvestorsConfidence:InvestorconfidencecanshiftrapidlyandcountrieswithahighCADaremorevulnerabletoshifts.Theseshiftscanoftenhaveadramaticeffect
andsometimescantriggeramajorcrisis.
TERMS OF TRADE
ThetermsoftradeshowtherelationshipsbetweenthepricesAustraliareceivesforitsexportsandthepricesthatitpaysforitsimports.
Thetermsoftradeimprovewhenexportpricesarerisingrelativetoimportpricesanddeterioratewhenimportpricesarerisingrelativetoexportprices
=
ChangesintheTOTIcaninfluenceAustraliasbalanceofpayments.Ifthetermsoftradedeteriorate,thenthesamevolumeofexportsbuysfewerimports.Thiscanleadtoalargedeficitonthebalanceof
goodsandservicesincreasingtheCADandforeignliabilities.
S I ZE OF THE CURRENT ACCOUNT BALANCE AS A PERCENTAGE OF GROSS DOMESTIC PRODUCT
Byanycomparison(CADasaproportionofGDP),AustraliasustainsahighCADaveraging2.7%inthemid80stoover4%ofGDP.
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FOREIGN DEBT AND FOREIGN L IAB I L I T I ES
AustraliasforeignliabilitiesarewhatAustraliaowestotherestoftheworld.Thisincludesthemoneythatwehaveborrowedfromoverseas.Wemustpayinterestonthismoneyandthecostofservicing
theseloans
(interest
payments)
appears
as
a
debit
on
the
Current
Account.
Ifwehavelargeforeignliabilitiesthenthismeansthatwehavelargerdebitsonthecurrentaccount.Ifthisdebitexceedsthebalanceongoodsandservicesandthecreditonthenetincometransfersthen
havewillhaveaCAD.
AprolongedCADcanresultinthedebttrapwheremoneyneedstobeborrowedtofundthecostsofservicingtheloansandthenmoreneedstobeborrowedagainresultingingreaterforeignliabilities
andahigherCADetc.theVCAD
Lowlevelsofnationalsavingscontributetohigherlevelsofforeignliabilitiesaswell.Overthelasttwentyyears,thelevelofnationalsavingshasbeendroppingfrom15%ofhouseholdincomein1980/81
to 3%in2002/03andbackupto3%in2008/09.
BecauseofthelowlevelofsavingswithinAustralia,wemustrelyonthesavingsofothercountriestofundlocalinvestmentandbudgetdeficits.Byborrowingfromoverseaswemustthenservicethese
loansandtheinterestpaymentontheseloansmakeupasignificantportionofourCAD.
Foreignborrowingsaresubjecttochangesinoverseasinterestratesandotherfluctuationsintheexchangerateofthe$Aunlikelikedomesticborrowings.
DebtandEquity
NetForeignDebt:isthetotalstocksofleansowedbyAustralianstoforeignersminusthetotalstockofloansowedbyforeignerstoAustralians
NetForeignEquity:isthetotalvalueofassetsinAustralia(land,shares)minusthetotalvalueofassetsoverseas
that
are
owned
by
Australians.
INTERNAT IONALCOMPET IT IVENESS
STRUCTURAL CHANGE IN THE AUSTRAL IAN ECONOMY
ToimproveAustraliasCADweneedtodiversifytheexportbaseandmovefrommainlycommoditybasedexportsintootherareassuchasservicesandElaboratelyTransformedManufactures(ETMs).
MicroeconomicreformintheshorttomediumtermcanalsoimproveourinternationalcompetitivenessbyloweringcostsandimprovingthequalityandreliabilityofAustralianproducts.
Microeconomic
reform
measures
include:
o Reducingtheinflationratetothatofonebelowcountrieswecompetewith.Thisadvantagesourexportersbyreducingtheircostsofproduction.
o Innovationrequiresahighlyeducated,highlyskilledworkforce.HighlevelsofinvestmentinR&Dforexportsuccessinhighvalueaddedservices.
o Tocompeteinternationally,Australiamustsustainproductivitygrowthtouseresourcesandtheworkforcemoreefficiently.
o Competitivelabourcostsaslabouristhelargestcomponentofbusinesscosts.Excessivewagegrowth(when > )willincreasethecostsofproduction.
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o Changeroleofgovernmentandmoreefficientpublicsectorincludingkeepingbudgetdeficitsundercontrolandaminimallevelofgovernmentownershipinbusiness.
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EXCHANGERATES
MEASUREMENTOF RELAT IVE EXCHANGE RATES
Exchangeratesarenecessarybecauseexportingfirmswanttobepaidintheirowncurrencysoimportersneedtobeabletoconverttheirdomesticcurrencyintotheforeigncurrency.
Theexchangerateworksduetothefloatingexchangeratemechanisminwhichthevalueofacountryscurrencyisdeterminedbythefactorsofdemandandsupplyinforeignexchangemarkets.
ToOtherIndividualCurrencies
TheexchangerateisthepriceofAustraliascurrencyintermsofanothercountryscurrencye.g.:1AUD=0.97USD.
TradeWeightedIndex
TheTradeWeightedIndexgivesanindicationofhowthevalueofthe$Aismovingagainstallcurrenciesingeneral.Itiscalculatedbymeasuringthevalueofthe$Aagainstthecurrenciesof
Australiasmajortradingpartnerscomparedwithabaseyear.
ThecurrenciesofthecountriesthataremoreprominentinAustraliastradearegivenahigherweightingsothattheyhaveagreaterinfluenceontheTWI.
OneweaknessoftheTWIisthatitisweightedaccordingtovolumesoftraderegardlessofthecurrencyinwhichexportandimportcontractsareinvoiced.Mustofourtradeisin$USandthe$A/$US
exchangerateismoreimportantthantheweightitreceivesintheTWI.
FACTORS AFFECT ING THE DEMAND FOR AND SUPPLY OF AUSTRAL IAN DOLLARS
Demandfor$Aisrepresentedbyallthosepeoplewhowishtobuy$A.Demandisaffectedby:o ThesizeoffinancialflowsintoAustraliafromforeigninvestorswhowishtoinvestinAustralia
andneedtoconverttheircurrencyinto$A.
ThelevelofAustralianinterestratesrelativetooverseasinterestrates. Theavailabilityofinvestmentopportunities.
o Expectationsofafutureappreciationofthe$Awillincreasedemandbyspeculators.o ThedemandforAustralianexports:
Changesincommoditypricesandinthetermsoftrade Demandforexportsinfluencedbythedegreeofinternationalcompetitiveness Changesinglobaleconomicconditions. Tastesandpreferencesofoverseasconsumers.
Supplyfor$Aisrepresentedbythosepeoplewhowishtosell$A.o TheleveloffinancialflowsoutofAustraliabyAustralianinvestorswhowishtoinvest
overseasandmustsell$Atopurchaseforeigncurrency.
ThelevelofAustralianinterestratesrelativetooverseasinterestrates Theavailabilityofinvestmentopportunities.
o Expectationsofafuturedepreciationofthe$Awillfuelspeculatorstosell$Acontributingtotheexpecteddepreciation.
o Domesticdemandforimports: Levelofdomesticincome
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Dirtyingthefloat:o TheRBAcanbecomeabuyerandsellerintheforexmarketifitfeelsthatalargeshortterm
changeintheexchangeratewillbeharmfultotheeconomy.
o TopreventarapiddepreciationTHE EFFECTS OF FLUCTUAT IONS IN EXCHANGE RATES ON THE AUSTRAL IAN ECONOMY
FREETRADEANDPROTECTION
AUSTRAL IAS POLIC IES REGARDING FREE TRADE AND PROTECT ION
THE IMPLICATIONS OF AUSTRAL IA S POLIC IES FOR INDIV IDUALS, F I RMS AND GOVERNMENTS
IMPLICAT IONSFOR AUSTRAL IA OF PROTECTIONIST POLIC IES OF OTHER COUNTRIES AND INTERNAT IONALORGANISAT IONS
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EconomicIssues
ECONOMICISSUESINTHEAUSTRALIANECONOMY
ECONOMICGROWTHL Economicgrowthcreatesjobs,allowsindividualstoincreasetheirconsumption Economicgrowthisusuallyseenasthesinglemostimportantmeasureofaneconomysperformance. Economicgrowth:anincreaseinthevolumeofgoodsandservicesthataneconomyproducesovera
periodoftime.
AGGREGATE DEMAND AND ITS COMPONENTS: Y = C+I+G+XM
Aggregatedemandisthetotallevelofexpenditureintheeconomyoveraperiodoftimeincludingconsumption,investment,governmentspendingandnetexportspending(exportsimports)
AD=C+I+G+(XM) AggregateDemand=Consumption+Investment+GovernmentSpending+(eXportsiMports) EconomyisinequilibriumwhenAD=AS Factorsinfluencingconsumerconsumption:
o Consumerexpectations:ifconsumersexpectpricestorise,highrealincomesorfutureshortages,theywilltendtospendmoreandsaveless.Appliesinreverse.
o Levelofinterestrates:increaseininterestrateswilldiscourageindividualsfromspendingtheir
money
and
encourage
saving.
A
decrease
will
have
an
opposite
effect.
o Distributionofincome:themoreequitablethedistributionofincome,thehighertherateofspendingandviceversa.PeopleonlowerincomeshaveahigherMPCthanthoseonhigher
incomes.
Factorsinfluencingbusinessinvestmentarethecostofcapitalequipmentandbusinessexpectations:o Changesininterestrates:lowerratesmakesitcheapertoborrowfundstopurchasecapital
equipmentandviceversa
o Governmentpolicies:relatingtoinvestmentallowancesandtaxconcessionsoncapitalgoods.Ahigherratesofdepreciationoncapitalmeansthatcapitalbecomesrelativelycheaper
o Priceorproductivityoflabour:relativecostsoflabourcomparedwithcapitalandlabourisacapital
substitute.
If
the
cost
of
labour
increased
while
price
of
capital
remained
the
same,
capitalhasbecomerelativelycheaper
o Businessexpectations:Ifbusinessesexpectmoredemandforaproducttheywillinvestmenttoboostproduction.Iftheeconomyisexpandingthenbusinesseswillinvesttoasrisk
associatedisdeclining.Newertechnologieswouldencouragegreaterbusinessinvestment.
Inflationleadstouncertaintyaboutthefutureleadingtoreducedinvestment
Factorsinfluencinggovernmentspendingandtaxation:thegovernmentwishtochangetheirlevelofspendingtoinfluenceADdependingontheeconomicactivityinaneconomy.
FactorsinfluencingExportsandImports:Thelevelofoverseasanddomesticincome,exchangerates,consumertrendsandpreferences.
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Employment:economicgrowthcreatesjobsandcanensurethateveryonewhoiswillingandabletoworkisableto.
Inflation:highlevelsofeconomicgrowthcanresultinpricesincreasesandlargerwageclaimscontributing
to
inflation.
Happens
when
growth
in
AS
cannot
keep
pace
with
growth
in
AD.
ExternalStability:strongereconomicgrowthisusuallyassociatedwithincreasedconsumerandbusinessspendingleadingtohigherlevelsofimports.Duetoproportionallyhigherspendingon
imports,thiscanresultinariseintheCADposingarisktotheexternalstabilityoftheeconomy.
Incomedistribution:economicgrowthcontributestohigherlivingstandardsandbetteroutcomesbutnotnecessarilyforeveryone.Some
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