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Chapter 1: International Economic Integration © Tim Riley Publications Pty Ltd

24

Year 12 Economics 2015 © Tim Riley Publications Pty Ltd

GLOBALISATION AND ECONOMIC INTEGRATION

1. Define the process of globalisation and explain how it has affected people’s lives.

2. Refer to Extract 1.1 and discuss the main features of the new global economy.

3. Define the term ‘economic integration’ and explain how it is linked to the process of

globalisation.4. Describe the characteristics and forces that underpin the process of globalisation.

5 Discuss the growth in world output and trade due to the process of globalisation. Why did

world output and trade decline in 2009? What are the IMF’s forecasts for global economic

recovery in 2013-14?6. Discuss the main categories of world exports of goods and services.

7. How has globalisation affected the shares of world exports going to high, middle and low

income countries? Refer to Figure 1.5 in your answer.

8. Discuss the impact of the Global Financial Crisis on global financial flows in 2008-09. What

are the main types of financial instruments traded in global capital markets?

9. List the most important currencies and foreign exchange markets that make up the world foreign

exchange market from Table 1.8 and Table 1.9.

10. Distinguish between foreign direct and portfolio investment. What factors have led to the

growth of these types of investment on a global scale?

11. Contrast the composition of world foreign direct investment between 1995 and 2012 for high,

middle and low income countries from Table 1.10. Account for the changes in the shares of

world foreign direct investment for each of these three country groups between 1995 and 2012.

12. Discuss the linkages between MNCs and foreign direct investment. List some examples of the

largest MNCs in 2014, their countries of origin and the industries in which they operate.

13. Discuss the main features of global production webs operated by MNCs.

14. Explain how developments in technology, transport and communications have assisted the

process of globalisation and the growth in world output and world trade.

15. What is meant by the international division of labour? How has the specialisation and mobility

of labour assisted the globalisation of production?

16. Discuss the impact of globalisation on the growth of migration and workers’ remittances.

17. Define the following terms and abbreviations and add them to a glossary:

REVIEW QUESTIONS

communicationsdebt securitiesderivatives tradingeconomic integration

electronic commerceequity securitiesforeign direct investment

global financial flowsglobal foreign exchange

global production webs

ETMsFDIHCNsICT

ILO MNCsNIE

PCNsTCNsWWW

global trade flows globalisationinformation technology revolution

international division of labour

international migrationInternetportfolio investment

technology diffusiontransportworkers’ remittances

Review Questions

Chapter 2: Free Trade and Protection

© Tim Riley Publications Pty Ltd

58

Year 12 Economics 2015

© Tim Riley Publications Pty Ltd

debt, and could use protective devices to reduce import spending and switch import expenditure

to domestically produced goods. This policy could have adverse effects, because specialisation is

not encouraged according to comparative advantage and resources may be diverted to less efficient

industries. Also, export and import competing industries and consumers may face higher prices for

imported inputs and outputs, reducing competitiveness and living standards in the economy.

Other arguments used to justify protection may not be based on economic grounds, and may seek

to promote political, social or cultural goals. These include the military self-sufficiency or defence

argument (where national defence industries are protected to ensure war-time supply); and the national

spending argument such as the ‘buy Australia’ campaign which encourages expenditure switching from

imports to domestic goods, irrespective of prices and quality. Associated with this argument is the

desire to protect national sovereignty and Australia’s cultural identity such as subsidising local films and

television and the entertainment industry. Other arguments for protection include the diversification

of industry; using protection as a strategic industry policy to ‘pick winners’ since the world trading

environment is not considered to be a ‘level playing field’ because it is dominated by MNCs and trading

blocs; and to increase government revenue through the imposition of higher tariffs on imports.

THE METHODS OF PROTECTION: Tariffs, Subsidies and Quotas

Both tariff and non tariff barriers are used to protect domestic industries. Tariffs are a tax on imports

through the payment of customs duty. The payment of customs duty by an importer has the effect of

raising the landed price of imported goods. Local producers can then raise their prices and compete

more effectively with imports by capturing and maintaining a larger share of the domestic market than

would occur in the absence of protection. Tariffs raise revenue for the government and cause resources

to be reallocated from efficient and competitive industries to inefficient and uncompetitive industries.

The effects of a tariff on a traded good are illustrated in Figure 2.4. The domestic demand and supply

curves, DD and SS intersect at E to give an equilibrium price of OP and quantity of OQ. The world

price for the product is OW. At the world price OW, domestic firms are only willing to supply OQ1 but

consumers demand OQ2. The shortfall in domestic supply in relation to domestic demand, is made up

by imports of Q1Q2

. If the government imposes a tariff equivalent to OT (OWOT - OW), domestic

supply will extend from OQ1 to OQ3

, but domestic demand will contract from OQ2 to OQ4

. Therefore

imports will contract from Q1Q2

to Q3Q4

. The four direct effects of the tariff are the following:

Figure 2.4: The Effect of a Tariff

D

D

S

S

Q 1 Q 3

Q Q 4 Q 2

Q tariff

Protection

effect

Price effect

Consumption

effect

Revenue effect

Redistribution effect E

P

0

OW OWOT

P

a

b

c d

Chapter 1: International Economic Integration © Tim Riley Publications Pty Ltd

20

Year 12 Economics 2015 © Tim Riley Publications Pty Ltd

ThegrowthinInternetusersworldwideisillustratedinFigure 1.9.GlobaltradeinexportsofICTgoods

hascontinuedtogrowwithincreasedexportsfromChinaandtheAsianTigereconomies(i.e.South

Korea,Taiwan,HongKongSARandSingapore)totheUSA,Europeandothermarkets.Table 1.14

showsthathightechnologyexportsaccountedfor17.6%ofallmanufacturedexportsintheworldin

2012,andbetween17%and18%ofmanufacturedexportsindevelopingandhighincomecountries.

Figure 1.9: The Growth in Internet Users (per 100 people) Worldwide 2000 to 2011

Source: World Bank (2013), World Development Indicators 2013, World Bank, Washington DC.

Table 1.14: The Structure of World Exports in 2012

Primary Exports Manufactured Exports High Technology Exports

(% of merch. exports) (% of merchandise exports) (% of manufactured exports)

World 30.0%

68.0%

17.6%

Developing countries 33.0% 68.0%

18.1%

High income countries 28.0% 68.0%

17.4%

Source: World Bank (2014), World Development Indicators 2014, World Bank, Washington DC. Tables 4.4 & 5.13

Technology DiffusionChangesintechnologyarecreatedbycountrieswhicharetechnologyleadersandinnovatorssuchas

theUnitedStates,JapanandselectedcountriesintheEuropeanUnionsuchasGermany,France,Italy,

Britain,SwedenandFinland.Innovativetechnologiesinthesecountriesareexportedtotherestofthe

world,andtheextenttowhichtheyaretakenupisknownastechnology diffusion.Thediffusionof

newtechnologiesisbestillustratedbytheextenttowhichhightechnologyproductsdominateexport

expansionduetotheirhighvalueaddinginproduction.Forexamplehigh,mediumandlowtechnology

manufacturedgoodshadthefastestgrowthinexportcategoriesintheworldbetween1985and1998.

Since2000thegrowthinmobilephonesubscriptionsworldwidehasbeenadefiningfeature(alongwith

increasingInternetusage)ofthespreadanddiffusionofnewtelecommunicationstechnologies.

TransportTransportinfrastructureincludesroads,railways,ports,waterways,airportsandairtrafficcontroland

theservicesthatflowfromit.Thesecapitalassetsarevitalfortheoperationofdomesticeconomiesand

theglobaleconomy.Thisimportancestemsfromthemovementofresourcesincludingrawmaterials,

finishedgoods,capitalequipmentandlabourbetweenhouseholds,producersandgovernments.Data

fromtheWorldBank(2014)estimatedthat57%oftheworld’sroadswerepavedwithhighincome

economieshaving84.6%oftheirroadspaved,whilstlowincome(16.3%)andmiddleincome(55%)

economieshavemuchless,whichrestrictstheefficientmovementofpeopleandfreight.

Economic AnalysisClear Graphs and Tables

© Tim Riley Publications Pty Ltd

Year 12 Economics 2008

TOPI

C O

NE

The global economic outlook improved between 2013 and 2014 led by fragile recoveries in

the advanced economies. Global growth was around 3% in 2013, its highest since the Global

Financial Crisis. The IMF forecast world output growth of 3.5% in 2014, strengthening to 3.75%

in 2015 and 2016. However the global recovery is characterised by divergent conditions across

advanced and emerging market economies, with uneven growth across regions and countries.

The USA was forecast to grow by 2.75% in 2013 and 3% in 2014, supported by low interest

rates and quantitative easing. In contrast the Euro Area’s growth remained weak with recession

in 2013 and growth of only 1% forecast for 2014. The EU’s financial system remains impaired

and the process of fiscal consolidation is still incomplete. Japan’s recovery has been supported by

monetary stimulus but growth is only forecast at 1.5% in 2014, the same as in 2013. In the major

emerging countries, China’s growth moderated to 7.7% and India’s to 4.4% in 2013. China’s

growth is forecast at 7.25% in 2014, slightly below the official government target of 7.5%.

EXAMINE ECONOMIC ISSUES

• Examine the effects of globalisation on economic growth and the quality of life, levels of

unemployment, rates of inflation and external stability;

• Assess the potential impact on the environment of continuing world economic development;

• Investigate the global distribution of wealth;

• Assess the consequences of an unequal distribution of global income and wealth; and

• Discuss the effects of protectionist policies on the global economy.

THE GLOBAL

ECONOMY

TOPIC FOCUS

This topic focuses on the study of the operation of the global economy and the impact

of globalisation on individual economies.

Students should learn to examine the following economic issues and apply the following

economic skills in Topic 1 of the HSC course:

APPLY ECONOMIC SKILLS

• Analyse statistics on trade and financial flows to determine the nature and extent of global

interdependence;

• Assess the impact on the global economy of international organisations and contemporary trading

bloc agreements; and

• Evaluate the impact of development strategies used in a range of contemporary and hypothetical

situations.

1Skills Outcomes

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