The Global Economy

HSC Topic 1

Think, pair, share

1. Write your own definition of globalisation

2. Share it with a partner and revise your definition

3. Develop a group definition

Here are a few…

• “…a primarily economic phenomenon, involving the increasing interaction, or integration, of national economic systems through the growth in international trade, investment and capital flows.”

• …a process in which geographic distance becomes a factor of diminishing importance in the establishment and maintenance of cross border economic, political and socio-cultural relations

• “… the rapid increase in cross-border economic, social, technological exchange under conditions of capitalism.”

• “a process (or set of processes) which embodies a transformation in the spatial organization of social relations and transactions, expressed in transcontinental or interregional flows and networks of activity, interaction and power”

http://www.globalisationguide.org/01.html

Globalisation affects…

• Poverty

• Environment

• Gender

• Culture

• Political structure

Global Economy

Developed or advanced

Economies (AIE’s)

Newly Industrialised Economies (NIE’s)

Developing or Less Developed countries (LDCs)

Economies inTransition (TECs)

Developed or advanced industralised economies (AIEs)

• High levels of economic development (exceeding US$20,000 per capita)

• Market based economies with a free enterprise system of resource allocation

• Limited government intervention

Developed or advanced industralised economies (AIEs)

• Resource rich• Sophisticated system• Dominate world output, trade and

investment flows• Supply of exports, demand for imports• Goal is maintenance of high standard of

living• Lend to developing and transition

economies

Developed or advanced industralised economies (AIEs)

• USA• Japan• Germany• United Kingdom• France• Italy• Canada• Australia• New Zealand

Newly Industrialised Economies (NIEs)

• Have transitioned from developed or developing economies by achieving high levels of economic growth an per capita income

Newly Industrialised Economies (NIEs)

• Singapore

• Taiwan

• South Korea

• Hong Kong

Newly Industrialised Economies (NIEs)

• High rates of ec growth since 1990s and 2000s (between 6-8% pa)

• Growth based on – rapid industrialisation– high levels of savings and investment– export oriented industries– high levels of foreign investment– skilled & educated workforce– strategic role played by govt in selecting industries for

development

Developing or less developed countries (LDCs)

• In the process of raising their rates of ec growth and development but are yet to have higher per capita incomes or living standards

Developing or less developed countries (LDCs)

• Lack of capital and access to export markets

Developing or less developed countries (LDCs)

• India

• China

• Nigeria

• Brazil

Economies in Transition (TECs)

(former socialist countries)

• Russia

• Poland

• Hungary

• Rumania

Also• Poland• The Czech Republic• Slovakia• Estonia• Latvia• Hungary• Lithuania• Slovenia

Economies in Transition (TECs)

• Experiencing problems relating to transition from centrally planned to market economies

• They have – privatised government business enterprises– Created a system of markets– Established private property rights– Introduced more effective monetary and fiscal policies

to control inflation and unemployment• Sought export markets to increase integration

with world economy• Floated exchange rates and removed obstacles

to trade

What is the Global Economy?

What is the Global Economy?The Global economy is the world economy. It is the

economic activity going on in the world. It includes all production, trade, financial flows, investment, technology, labour and economic behaviour in nations and between nations.

The estimated total output of the world economy in 2005 was valued at over $53 trillion US having grown a further 4.8% in 2005.

The IMF (2006) estimated that in 2005, 52% of World GDP at purchasing power parity was owned by the richest 15% of the global economy,

with the poorest 65% sharing less than 15% of World GDP between them.

How do we measure the size of the Global Economy?

• Like an individual economy, the global economy can be measured in a variety of ways. The total value of each nation’s assets added together would determine the asset value of the world economy.

• This would be difficult to measure as the asset value of any country is difficult to calculate due to– inflation,– tax avoidance and– lack of statistical data.

How do we measure the size of the Global Economy?

• As in individual economies, what we are concerned about is the change in output. This allows for a comparison to be made in terms of growth in the economy.

• The value of the world’s output, also known as World Real GDP or Real Gross World Product, is the aggregate of individual nation’s outputs.

How do we measure World Output?

• World Output is measured in two ways:

1. The value of world output in $US at market exchange rates - This adjusts the individual nation’s outputs into US dollar values.

2. The value of world output in $US at purchasing power parities (PPP) - This compares the relative prices of products in different countries.

How does Purchasing Power Parity work?

• PPP can be measured in absolute terms or relative terms.

• In absolute terms, if for example the price of a bushel of wheat costs $3 in Australia and $6 in the USA, then the PPP(absolute) is equal to the price level in Australia divide by the price level in the US, ie 3/6 = 1/2.

• So one Australian dollar is worth two US dollars.

How does Purchasing Power Parity work?

• There are problems with the absolute measure including the large number of products, transport costs, tax rates and trade barriers, which prevent this from being an accurate measure of relative prices.

• For these reasons the relative measure is more acceptable.

• The relative PPP relates to changes in price levels in the two countries. If prices in one country rise faster then that currency will depreciate in value.

Relative Purchasing Power Parity

• The relative PPP is stated in terms of domestic currency per unit of foreign currency. It is calculated as the exchange rate in a base year multiplied by the ratio of the price index in the home country divided by the price index in the foreign country.

• For example if a base year is 2000 and the current year is 2006, it would equal Australia’s exchange rate compared to the $US in 2000 times the price index in Australia divided by the price index in the USA.

• PPP (relative) = (Exc A/US 2000) x ( CPI A / CPI US in 2006)

IS THE WORLD ECONOMY GROWING?

IS THE WORLD ECONOMY GROWING?

The world economy has been growing, averaging 4.1 % annual percentage growth from 2000-2005. However, the growth was not equal. Annual % Growth

USA 3.1EUROPEAN UNION 2.1JAPAN 1.3ADVANCED ECONOMIES (Total) 2.6AFRICA 4.3DEVELOPING ASIA 7.4CIS (Former USSR) 5.8

IS THE WORLD ECONOMY GROWING?

• It has not been consistent over the period.

World economicslowdown

Asiancrisis

Terrorist attacks

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6

19

91

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% Change in Real GWP

The International Business Cycle

• The global economy also goes through cycles of growth and decline. These cycles have a major impact on most of the economies in the world. This is known as the International Business Cycle.

GWP

Years

Boom

Downswing

Trough

Upswing

What forces are currently operating in the Global Economy?

There are a number of relatively new and largely unpredictable forces operating in the global economy. These include

the terrorist attacks of September 11th and subsequent terrorist attacks, the outbreak and spread of the SARS virus and

bird flu the war in Iraq and high world oil prices

What forces are currently operating in the Global Economy? Uncertainty discourages consumer and

investment spending and subsequently economic growth.

Despite this many businesses and consumers have increased their spending as the fears decline.

What is Globalisation?

For the purpose of this subject we will define Globalisation as having two key aspects. They are:

1. The actual movement across nations of• Trade• Investment• Technology• Finance and• Labour

What is Globalisation?

2. The capacity to move and the potential movement across nations of

• Trade• Investment• Technology• Finance and• Labour

The actual movement across nations of Trade

The level of global trade has been growing dramatically since the end of World War II.

The rate of growth in world trade doubled from 9% in the 1960’s to 20% in the 1970’s.

It continued to grow by 5% in the 1980’s and by 6% in the 1990’s. Overall world trade growth in the 1990’s was about double the growth in GWP.

Despite a slowdown after 1997 due to the Asian economic crisis, world trade grew by 12.4% in the year 2000 but slowed after September 11th and the US share market crash.

The volume of world trade grew by 7.4% in 2005 up from 10.6% in 2004 and is projected to rise by 8.9% in 2006.

World Trade in Goods and Services

Trade in Goods and Services

The growth in export volumes in Advanced economies averaged 5.4% per annum from 2000-2005 compared to 8.9 % for developing economies.

World trade is dominated by the advanced economies.

The IMF (2006) reported that the richest 15% of nations had 70% of the global trade.

With the poorest 30% with less than 4% of trade.

Trade in Goods and Services• A major concern for developing economies is their Terms

of Trade - The relative prices of exports compared to imports -

Export Price IndexImport Price Index

• The Terms of Trade for developing economies fell on average by 0.8% per annum, compared to an increase of 0.2% per annum in advanced economies, during the 1990’s. This followed on from an annual decline of 2.7% per annum in the 1980’s for developing economies and a 0.8% increase per annum for advanced economies.

• While trade is increasing in the developing countries the decline in the Terms of Trade can lead to a greater debt burden for the developing economies and increased income transfers to advanced economies.

International Investment

This relates to investment by Transnational Corporations. This is also known as International Direct Investment (IDI).

There are approximately 60,000 transnational corporations (TNC’s) with over 500,000 foreign affiliates.

They account for about one quarter of total global output and production of foreign affiliates currently exceeds the level of world trade by 1.3 times.

International Investment

• In addition UNCTAD estimates that 1/3 of all world trade involves transfers within TNC’s.

• International Direct Investment is growing at roughly 3 times the rate of GWP. The level of IDI flows has risen from 44 billion US dollars in 1985 to over 1.2 trillion US dollars in 2006, a rise of 22% over 2005.

• 68% of the IDI comes from the richest 20% of nations and only 1% from the poorest 20%.

• In recent years the areas of greatest new investment has been into the emerging markets in Asia, South America and the countries of the former USSR.

• This has occurred due to their relatively low wage rates and growing economies.

Trends in Global Investment

Annual % change

Technology

• New information and communication technologies are driving globalisation.

• The cost of global communication is declining and innovative tools are becoming easier to use.

• The Internet, mobile phones and electronic funds transfer are opening up the global market place.

Technology• The internet had more than

1billion users in the middle of 2006, but 50% of users were in the richest 15% of nations. Only 3% of Africa’s and 10% of Asia’s populations used the internet.

• Improved communication can foster great advances in health and education.

• Barriers of size, time, distance and costs are falling for small businesses in the world.

Technology

• Tighter property rights are increasing the price of technology transfer, blocking many developing countries from their use both whether it be in production, communication, education or health care.

• Thus increasing the power and wealth of TNC’S.

International Financial Flows

These have grown most rapidly of all, at 10 times the rate of world GDP.

• Since the phasing out of controls on foreign exchange trading in the 1970’s, international financial flows have grown exponentially.

• In 1980 global foreign exchange trading was 10 times the value of world trade.

Derivatives

• A derivative is a financial security traded on the value of an underlying asset (ie it is not trade in the asset itself, rather the expected change in the asset’s value)

• Common underlying assets include:– Bonds– Commodities– Currencies– Interest rates – Market indexes

http://www.investopedia.com/terms/d/derivative.asp

Derivatives

• Derivatives are typically highly leveraged and used to hedge risk

• May also be used for speculative purposes (eg to make a short term profit due to expectation of movement)

• Common examples are:– Futures contracts– Forward contracts– Options– Swaps

http://www.investopedia.com/terms/d/derivative.asp

The Growth of Derivatives

Global Derivatives Markets($USbn, amounts outstanding)

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1 3 5 7 91990 1992 1994 1996 1998 2000 2002 2004 2005

International Financial Flows

Only 1% of the foreign exchange market involves payments for trade. Most of it involves forms of derivatives trading.

Foreign Exchange trading is now estimated to be more than 100 times the value of world trade and growing.

Financial flows take many forms. The fastest growing area has involved interest rate, currency, equity and commodity derivatives.

Interest rate and currency derivatives make up approximately 90% of the total value of derivatives traded.

What are Derivatives?

Derivates are simple financial contracts whose value is linked to or derived from an underlying asset, such as stocks, bonds, commodities, loans and exchange rates. They are international financial instruments for spreading risk or hedging. They include:

• futures,• options,• swaps,• forward rate agreements and• other hedging instruments.

What are Derivatives?

• Futures: a currency future is a contract that you can effectively lock in the price at which you buy or sell a foreign currency, at a set date in the future.

• Options: a currency option gives the buyer or holder of the option the right to buy or to sell foreign currency at some time in the future, at a price set today.

What are Derivatives?

• Swaps: a currency swap is an agreement to exchange currency during a specified period of time. For example, swapping 100 million Australian dollars for US dollars now and an agreement to reverse the swap within 3 months.

• Forward Rate Agreements: This is a contract between two parties to lock in a given interest rate or exchange rate starting at some time in the future for a set period of time. For example guaranteeing to lend $10 million at 8% interest in 6 months time for 12 months.

International Financial Flows

International Financial Flows

The biggest increase in derivative trading in 2005 occurred in commodity contracts - rising 25%, followed by equity derivatives (11%) and interest rate derivatives (5%).

The main cause of the growth in commodity contracts was rising commodity prices in 2005-06.

Equity derivatives were especially aimed at emerging markets in Latin America and Asia and in the US share market.

An important point to note is the amount of foreign exchange traded in one day is greater than all the reserves of the world’s Central Banks.

The International Movement of Labour

• The international movement of labour has been growing since the 1960’s.

• About 20% of workers in Western nations are immigrant workers who were not born in that nation and the ratio is increasing.

The International Movement of Labour• A growing development in

the global labour market is the outsourcing of work to economies with cheaper labour.

• The next bill you pay or inquiry you make by phone to an Australian business could be answered by a call center in India, Porta Rica or China.

The International Movement of Labour

• A growing development in the global labour market is the outsourcing of work to economies with cheaper labour.

• The next bill you pay or inquiry you make by phone to an Australian business could be answered by a call center in India, Porta Rica or China.

The Global Expectation

• Globalisation also includes the potential impact of changes in the global market on economies.

• It means businesses consider the potential entry of international competitors into their markets.

• So businesses plan pricing strategies and employment policies based on what could happen if cheap foreign producers or TNC’s entered the market.

The Global Expectation

It also means businesses consider, or threaten to set up, their operations in countries where profits are expected to be greatest, eg. low wage countries or where unions are suppressed, low corporate tax ratesThe globalised financial market, and the ease with which funds can be transferred, means that finance is allocated according to international criteria of expected profitability and risk.

Gross World Product

• Calculated by the International Monetary Fund (IMF)

• Total market value of all goods and services produced by all countries over a given period of time adjusted for national price variations

Globalisation & Economic Integration

• Economic integration is the removal of trade barriers between countries to facilitate growth and international trade

• Promoted through standardisation of products (eg electrical goods with multiple power adapters)

Process of Globalisation

Expedited by• Increasing customisation of products and

services• Improved levels of technology,

communications, transport and IT reducing transaction costs of global business

• Rapid liberalisation of global trading environments through trade agreements (we’ll get to this)

Global Business

• International trade

Global Trends

• Growth in global businesses has been exponential in the past 5 decades

Task

• List 10 companies you can think of that trade within and outside Australia

• Research the internet the determine where the company’s home base is

• What percentage of your list are based in:– A Northern Industrialised country– Either France, Germany, Netherlands, Japan

or the US?

Transnational Corporations (TNCs)

• One of the main drivers of Globalisation• An organisation operating in more than

one company• Generate a significant amount of power in

the global economy• 95% home bases are in northern

industrialised countries• Over 50% from France, Germany,

Netherlands, Japan and US

http://www.halexandria.org/dward318.htm

Factors fuelling Globalisation

• To maximise profits by reducing average operating expense, TNCs will conduct operations in low wage rate companies

• Consumers are now exposed to products from countries across the globe, creating global consumers who are less attracted to local products

• Enhanced technology and logistical improvements have reduced the time and cost of transportation (postage), giving rise to global consumers deciding to purchased goods produced by TNCs.

• Deregulation and reduced government intervention have reduced barriers to trade

Activities

• List the main factors that have lead to the growth in TNCs and on integrated world economy

• Describe three major technological advances that have enabled world trade to increase.

• Many third world countries actively seek TNCs to operate within their borders. Outline the advantages and disadvantages TNCs can bring to a developing country such as Papua New Guinea.

http://www.hsc.csu.edu.au/business_studies/global_business/globalisation/globalisation.html

Aust in the Global Economy

• Population size and location could be disadvantages for the Australian economy

• This has been addressed through:– Increased competitiveness through reduced

protection– Capital inflows have enabled expansion as

comparatively cheap AUD is attractive to foreign investors

– Aust (exp. Sydney) forms part of the Global Network– Aust businesses have grasped opportunities

presented by trading internationally– Competition has ensured that only efficient business

survive

Revision

• Visit HSC online at the Charles Sturt University website

• http://www.hsc.csu.edu.au/business_studies/global_business/globalisation/globalisation.html

Globalisation and Exports

• Review 2 articles from the Austrade ‘Globalisation and Exports’ presentation

• Draw a table with three columns, labelled Positives, Minuses, Interesting

Globalisation and Exports

Positives Negatives Interesting

http://www.austrade.gov.au/Beyond-Our-Shores-Essays-on-Australia-and-the-Global-Economy/default.aspx

Gross World Product

International Business Cycle

Globalisation and Trade

Globalisation and Investment and Technology

• Reduced role of wholesalers and ‘middle men’ is reduced, reducing costs & increasing profits

• New products & services increase choice & competition, resulting in lower prices

• Ordering stock can be instantaneous, allowing firms to respond to changes in demand quickly and to reduce wastage

• Enables faster innovation generating product development and production methods

Globalisation and Finance

Globalisation and Labour

Free Trade and Protection

HSC Topic 1

What is free trade

• Occurs when no barriers to trade exist• Countries are able to specialise based on

their resource allocation• Countries will benefit from specialisation• International trade provides greater

opportunity to gain from specialisation and increases the variety of goods and services to all in the global economy

• Competition encourages productivity

Absolute Advantage

• Where one country can produce more than another country given the same resources allocation

Comparative Advantage

• Production at the lowest opportunity cost

Calculating Opportunity Cost

• To determine which items has the lowest opportunity cost, apply this formula

opportunity cost of producing a good or

service Good not being produced

Good being produced=

What is protection?

• Protection

Advantages and Disadvantages of Free Trade

• Think, pair, share,1. Watch the youtube video

http://www.youtube.com/watch?v=4ymhLDvF_J8

2. Create a mind map of advantages and disadvantages of Free Trade

3. Discuss your mind map with a partner4. Create a class mind map recording all

advantages and disadvantages5. Post mind map to wiki

Arguments for Protection

• Infant Industry argument• Domestic employment• Dumping• Defence

• In groups, research your text and the internet to present an argument FOR protection, based on one of the above factors.

Infant Industry Argument

Domestic Employment

Dumping

Defence

Methods of protection & their effects on domestic & global economy

What is the OECD

• Watch the youtube video

• http://www.youtube.com/watch?v=5-UYGmGD1v4&feature=player_embedded#t=15

• Write a list of functions performed by the OECD

• List the objective of the OECD (ie what is this organisation trying to achieve?)

• Describe the way globalisation has affected the international economy. Examine the impact of globalisation on individual countries and their citizens. How have countries tried to benefit from globalisaiton?

• Outline - explain the concept of globalisation– GWP– Trade– Inv & tech– Finance

• Effects– Generally increase standard of living– Increases inequality

• Efforts to benefit:– Increase free trade– Reduce protection– Trade blocs– Reduce regulation of domestic economies

Economic Benefits

• More job opportunities. Approx. 1.7 million jobs directly or indirectly connected to the production of exports

• 1 in 5 Australian jobs rely on exports, 1 in 4 jobs in regional Australia

• Exporters tend to pay higher wages, employ a higher proportion of full time permanent staff and are more likely to provide training for their staff than non-exporters

• Foreign exchange earnings allow Australians to import a wider range of products

• More open trade has increased average annual family income by $1000 each year since 1986

Business Benefits

• International competition encourages businesses to be more innovative, efficient and use new technology

• Exporting businesses generate growth in infrastructure, production facilities and research and design

• Opportunities for Australians to live and work overseas

• Development of personal and business relationships with people overseas

• Development of closer links with the rest of the world

National Benefits

• Business and international relationships are improved through exporting

• Exports and investment provide almost a quarter of Australia’s total income

• Exports add diversity to Australia’s national income sources, providing wider markets and less vulnerability to global economical downturns.