The Global Economy Summary Notes

7/23/2019 The Global Economy Summary Notes

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Leo ZhouMrs Robinson

International economic integration

The global economy

The global economy refers to the sum of the interactions between

the economies of individual countries that are now increasinglylinked together into one economic unit > where the economies ofindividual countries are linked to each other and changes in a singleeconomy can have ripple eects on others.

Gross World roduct

The aggregate value of all goods and services produced worldwideeach year in the global economy is known as the Gross Worldroduct !GW" -> refers to the sum of total output of goods

and services by all economies in the world over a period oftime.

Globalisation

Globalisation refers to the integration between dierent countriesand economies and the increased impact of international in#uenceson all aspects of life and economic activity.

trade in goods and services

$nternational trade in goods and services is an important indicator ofglobalisation because it is a measure of how goods and services areconsumed in other economies around the world.Trade has grown rapidly in recent decades due to globalisation%increasing from &'( ).* trillion !which is +), of global output" in-/ to &'( 0/.) trillion !which is */, of global output" in 1//.The volume of world trade has grown to over 0/ times its level in-2/ which is pre3globalisation.4nnual growth in the value of trade has generally been around twicethe level of world economic growth5 however% they are also muchmore volatile compared to GW% as shown by the fast contraction ofglobal trade compared to world economic output in economicdownturnsThe huge amount of global trade re#ects the fact that economies donot produce all the items they need% or they do not produce them ase6ciently as other economies% and thus have to import goods andservices.Global trade has grown strongly in recent decades because oftechnological developments in transport and communications%eectively reducing the cost of moving goods between economies

and providing services to customers in distant markets.4lso% governments have encouraged trade by removing tradebarriers and 7oining international and regional trade groups such as


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the World Trade 8rganisation !WT8"% 9uropean 'nion !9'"% and the4ssociation of (outh 9ast 4sian :ations !4(94:". Thesedevelopments have been a ma7or force behind increasing globaltrade.The composition of trade (what goods and services aretraded) impacts on individual economies.The direction of trade #ows has changed in recent decades% whichshows the changing importance of dierent economic regions.;etween -2 and 1//% high3income economies !concentrated in:orth 4merica and Western 9urope" saw their overall share of globaltrade fall from )1, of world merchandise e


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4nother indicator of globalisation is the rapid growth of investmentbetween countries over the past two decades. 9specially since thelate -*/s% the global economy has witnessed rapid growth in themovement of capital. 8ne measure of the globalisation ofinvestment is the e


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o Jodern T:s could not function without the communications

technology of international and mobile telecommunicationsand the internet

o 4dvancements in transportation such as aircraft and high3speed rail networks allow greater labor mobility betweeneconomies% as well as increased accessibility to tourism andtravel for consumers

@or the leading technology innovators and e


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4t the bottom end of the labor market% low3skilled labor is also indemand in advanced economies where it may be di6cult to attractsu6cient people born locally to do certain types of work. obs thatonly reAuire basic skills !and maybe do not reAuire any languageskills" are often =lled by migrants in the '( by migrants from Catin4merica5 in 9uropean countries% by migrants from 9astern 9uropeand 4frica5 in richer 4sian countries% by migrants from poorer 4siancountries.These trends in migration re#ect an international division oflabor% whereby people move to the 7obs where their skills areneeded% while the globalisation of the labor market is increasing% butthere are still signi=cant barriers to working in other countries.These barriers include immigration restrictions% language andcultural factors and incompatible education and professionalAuali=cation. Therefore% most people prefer to stay in the country oftheir birth where they are most familiar with the language andculture.(imilarly% 7ust as people may move countries in search of the best

7ob opportunities% corporations shift production between economiesin search of the most e6cient and cost eective labor. $n aglobalised business environment% many producers operate a globalsupply chain% with production facilities in several countries.The international division of labor re#ects the concept ofcomparative advantage. Ieveloping economies have a largepopulation of workers with only basic labor skills and educationlevels% giving them a comparative advantage in labor3intensivemanufacturing. 4dvanced economies have generally shifted awayfrom labor3intensive manufacturing to focus on specialiFed serviceaspects of the economy that use more highly skilled workers% who

are in greater supply in advanced economies.

The international and regional business cycles

The ebb and #ow of world economic growth is known as the

international business cycle% which refers to the changes in thelevel of economic activity in the global economy over time. 4lthoughthe levels of economic growth each year often dier greatlybetween countries% economic growth is stronger when the rest ofthe world is growing strongly and weaker when other countries aree


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by the in#uences of apan and hina% and we are seeing very highgrowth being e thisis a minor impact economically# but is a ma$or pointpolitically as the people will dislike it. Dowever% itshould correct itself in the long term% as the domesticeconomy redirects resources to areas of production in whichit has a comparative advantage


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Jay be more di6cult to establish new businesses and newindustries if they are not protected from larger foreigncompetitors !infant industry argument"

roduction surpluses from some countries may be %dumped&!sold at unrealistically low prices" on the domestic market%which may hurt e6cient domestic industries (note that thisis good for consumers but bad for domestic

industries) Jay encourage environmentally irresponsible production

methods because producers in some nations may producegoods at a lower cost because of weaker environmentalprotections and environmentally damaging practices

ole of international organiFations WT8% $J@% World ;ank%'nited :ations% 89I

The main role of the World Trade 8rganisation !WT8" is to provide aforum for negotiating agreements aimed at reducing obstacles

to international trade and ensuring an eAual playing =eld for allcountries% thus contributing to economic growth anddevelopment% as well as resolving trade disputes betweeneconomies. $t was formed in -2 and is the =rst internationalorganiFation with powers to enforce trade agreements acrossthe world.

The main role of the $nternational Jonetary @und !$J@" is to helpensure stability in the international system. $t does so in + waysLkeeping track of the global economy and the economies ofmember countries5 lending to countries with balance of paymentdi6culties5 and giving practical help to members.

The World ;ankKs main role in the global economy is helping poorercountries with their economic development. Their mainorganiFation% the 'nternational ank for Reconstruction and"evelopment% gives an indication of its focusL to fundinvestment in infrastructure% reduce poverty% and to helpcountries ad7ust their economies to the demands ofglobalisation. $t also has a number of organiFations that providespeci=c assistance to lower income countries% includingL the'nternational "evelopment ssociation% which providesRsoft loansS !loans at little or no interest to developing

countries"% the 'nternational inance *orporation% whoserole is to attract private sector investment to the World ;ankKspro7ects% and the +ultilateral 'nsurance ,uarantee gency%which provides risk insurance to private investors.

The 'nited :ations plays a larger role% covering the global economy%international security% the environment% poverty anddevelopment% international law and global health issues. $t hashistorically played an important role in supporting greaterlinkages between economies and promoting globalisation. $t hasalso overseen the development of a large number ofinternational agreements to enforce human rights and political

freedoms.The main role of the 8rganisation for 9conomic o3operation and

Ievelopment !89I" is to promote policies that will improve the


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economic and social wellbeing of people around the world. $tprovides a forum in which governments can work together toshare e


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global recession. The meeting achieved agreement on measures toimprove coordination of =scal stimulus being implemented bygovernments around the world% as well as on a plan for improvedsupervision of the global =nancial system and international =nancialinstitutions. 4 G1/ summit in 1/-/ focused on balancing the needfor a long3term place to reduce =scal de=cits while continuing tosupport global economic recovery.

Trading blocs% monetary unions and free trade agreements

4dvantages and disadvantages of multilateral !9'% 49%:4@T4% 4(94:" and bilateral agreements

4s trade has grown and economies have become more integrated%countries have moved to form agreements and trading alliances toensure that they are in the best position to gain from growing tradeopportunities and also to avoid being e


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'nilateral and multilateral trade agreements are the most eectiveway to reduce trade barriers.

Global @T4s are conducted by the World Trade 8rganisation !WT8"%which tries to break down trade restrictions$ncrease in regional trade agreements from 1* in -/ to 1* in1/--. 9mergence of regionaliFation instead of globalisationTrade within agreements are usually high while trade with countriesoutside the agreement are generally limited !9'% 49%:4@T4" withthe e


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economists argue that protection tends to distort the allocation ofresources in an economy away from areas of more e6cientproduction towards areas of less e6cient production. $n the longrun% this is likely to lead to higher levels of unemployment and lowergrowth rates. 8n the other hand% if protection is removed% it ishoped that better and more lasting 7obs will be created in othersectors within the economy that are internationally competitive.@urthermore% if a country protects its industries% it is possible thatother countries will retaliate and adopt similar protectionist policies.The net result could be that the country would maintainemployment in less e6cient protected industries but loseemployment in more e6cient e


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methods of protection and the eects of protectionist policies onthe domestic and global economy taris% subsidies% Auotas%local content rules% e


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5uotas

4n import Auota controls the volumeof a good that is allowed to beimported over a given period of time.$t guarantees domestic produces ashare of the market.

/ is the price at which the importedgoods would sell if there was no6uota imposed. 4t this price%consumers demand /-% domesticproducers supply /% and the Auantityimported would be -.

$f the government imposed a Auota restricting imports to 1+% thiswould have the eect of raising the price of imported goods to /-.

This price would allow domestic supply to e


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(ubsidies involve =nancialassistance to domesticproducers% which enables themto reduce their selling price andcompete more easily withimported goods.

This is shown by a rightwardshift of the domestic industryKssupply curve from (( to (-(-%which results in a lower marketprice. ;usinesses will be able tosell a higher Auantity of theirproduct on both domestic andglobal markets.

The Auantity produced increases from to -. The siFe of thesubsidy in per unit terms is the vertical distance between the ( and(-.

conomic 4ects

o Iomestic producers supply a greater Auantity of the good.

Therefore% the subsidy stimulates domestic production andemployment in the protected industry

o Jore resources in that economy are attracted to the protectedindustry% leading to a reallocation of resources from other

sectors of the economy !where production and employmentwill fall"

o onsumers pay a lower price and receive more goods%

because the subsidy shifts the supply curve for the sector tothe right. Dowever% consumers still pay indirectly for subsidiesthrough higher ta


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xport 'ncentives

9


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Ie=nitionL (teady growth in the productivecapacity of the economy !and soa growth of national income"

efers to the increase in realGI over time

,"3P value of goods O services

produced in an economy in agiven time

Real ,"3 not the nominalvalue !7ust dollars and cents"% ittakes into account in#ation

(ustained increase in theeconomic standard of livingof a countryKs population!broad measure of welfarein a nation"

efers to growth of human

capital inde


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3urchasing power parity !" is a theory that states thate


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when they do not have income and can be used to start a businessand generate income. 4ccording to 1//) research by economists atthe 'nited :ations 'niversity% global wealth is concentrated amonghouseholds in :orth 4merica !+0,"% 9urope !+/," and rich 4sia3aci=c countries like apan and 4ustralia !10,"% with the remainingcountries across Catin 4merica% 4frica% and 4sia !including hina and$ndia" sharing only a little over -/, of the worldKs economic wealth.Wealth is distributed even more unevenly than income throughoutthe global economy.

ote! 9ealth is the value of the stock of assets held by individualsat a point in time% while income is the amount of money% or otherbene=ts measured in money terms% which #ow to individuals orhouseholds% usually for their contribution to the production processor as a direct payment from the government over a period of time.

The distribution of wealth looks at the distribution of ownership ofassets in a society !or the world in the case of global wealth"% ratherthan the current income of members of that society as in thedistribution of income.

income and Auality of life indicators

,ross ational 'ncome !G:$"is the sum of value added by allresident producers in aneconomy plus receipts ofprimary income from foreignsources. $t is the most popularmethod for comparing livingstandards between dierenteconomies because incomemeasures the ability of anationKs citiFens to satisfy theirmaterial wants. eal G:$ =guresare obtained by discounting G:$growth for the eects ofin#ation.

8ne of the limitations in making comparisons between the siFes ofeconomies is the e


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The main alternative measure to G:$ is the :uman "evelopment'ndex !DI$"% to measure economic development. $t takes intoaccountL

o 8ife expectancy at birth. This indicates the health and

nutrition standards in a country. Digh levels of longevity arecritical for a countryKs economic and social well3being.

o 8evels of educational attainment. 9ducation is important

for the development of the skills of the workforce and thefuture development potential of an economy. The DI$measures the average number of years for which adults aged12 attended school and the e


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Cow levels of labor productivity% industrialiFation%

technological innovation and infrastructuredevelopment

Weak political and economic institutions% and a

high prevalence of corruption

e.g. ;angladesh% 9thiopia% Qimbabwe

o merging economies!These economies are in the process

of industrialiFation or moderniFation and are e


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,lobal inancial rchitecture

o Cong term international #ows of investment heavily favored

developed economies. This has changed in recent years%shifting from developed economies to emerging economies%but the 0) least developed countries still received 7ust 1, ofglobal @I$ in#ows in 1/-/

o (hort term =nancial in#ows heavily favors the more

prosperous emerging economies which oer better =nancialreturns for currency and stock market speculators

o The Rstructural ad7ustmentS policies the $J@ advocates serve

the interests of rich countries% and may not be appropriateto the conditions of many developing countries.

o Jany developing countries have massive foreign debtburdens. @or e


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o atural resources! :atural resources are low3value added

goods% but are important inputs for the production of highervalue3added manufactured goods and services. 9conomiesthat have an abundant and reliable supply of cheap naturalresources clearly have better opportunities for economicdevelopment than those that do not.

o 8abor supply and 6uality! Cabor is an input to the

production process for many sectors of the economy and isthus an important factor in#uencing development levels. Digh3income countries tend to have highly educated and skilledlabor resources% while low3income nations are characteriFedby high population growth% poor education levels and lowhealth standards% which reduces the Auality of the laborsupply

o ccess to capital and technology! Ii6culty in gaining

access to capital for investment and development is anotherma7or structural weakness of developing nations thatcontributes to their lower living standards. Cow income levels

provide little opportunity for savings that can be used forinvestment. oorly developed =nancial systems make itdi6cult for businesses to gain easy access to loans forinvestment purposes.

'nstitutional factors

o 3olitical and economic institutions! olitical instability%

corruption and a lack of law enforcement by governmentagencies tend to undermine the con=dence of investors% whowill be reluctant to take risks if their business interests arethreatened by an inadeAuate structure for solving institutional

problems.o conomic policies! Government economic policies are

needed to balance the roles of market forces and governmentintervention in the economy. $f all ma7or decisions are left tomarket forces% a country may achieve a high level of economicgrowth% but it may not improve education% health care andAuality of life. 8n the other hand% e


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Ieveloping economies have greater opportunities to grow byproducing goods for global consumer markets% and can also bene=tfrom greater access to new technologies and foreign investment.Digh income economies% especially through transnationalcorporations% should =nd growth opportunities shifting to globalproduction processes. 8n the other hand% some regions have notgained as much as might be e


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for one3third of total world e


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"e;nitions

,ross 9orld 3roduct (,93) 2 refers to the sum of total output ofgoods and services by all economies in the world over a periodof time

,ross ational 'ncome (,') 2the total income earned bydomestically owned factors of production over a period of time

'ncome 2the amount of money% or other bene=ts measured inmoney terms% which #ow to individuals or households% usuallyfor their contribution to the production process or as a directpayment from the government over a period of time

9ealth 2the value of the stock of assets held by individuals at apoint in time

,lobalisation 2 refers to the integration between dierentcountries and economies and the increased impact ofinternational in#uences on all aspects of life and economicactivity

oreign "irect 'nvestment ("') 2refers to the movement offunds between economies for the purpose of establishing a newcompany or buying a substantial proportion of shares in ane


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"iagrams

Tarrifs

/ is the price of imported goods ifthere was no tari4 applied !in asituation of free trade".

4t this price% consumers demand /-%domestic producers supply /% and theAuantity imported would be -.

$f a tari of - is imposed !thus% tariis /- /"% all of which is passed on to

the consumer% demand will contract to/+% domestic supply will e


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7ubsidies

They are shown by a rightward shift ofthe domestic industryKs supply curvefrom (( to (-(-% which results in alower market price. ;usinesses will be

able to sell a higher Auantity of theirproduct on both domestic and globalmarkets.

The Auantity produced increases from to -.

The siFe of the subsidy in per unit termsis the vertical distance between the (and (-.

Documents

The Global Economy Summary Notes